Encountered an obvious evil - What do I do?

[DubiousScroll]

I think the best suggestion I could offer for something like this would be to work with the other players OOCly.  Even adversarial RP should be something that is cooperative and fun for everyone involved, in my opinion.  

Ask them what they're comfortable with, where they'd like to see that sort of RP go, where you'd like it go, see if you can tell a story both sides can take something out of to enrich their characters.  If that's something you can't come to an agreement on, I think I would just retcon the encounter away and pretend it didn't happen.