I'm encountering the same problem. I've read that there's a Disposition check for either Cruel or Shady (or perhaps both?) but I have both of them at 0 anyway. The conversation ends abruptly the moment I try offering help. I'd appreciate any help on this matter as there are innocent lives on the line! I want to have the Ball and Chain from Cathwenna but currently I can't get it without killing them all (sadly it can't be pickpocketed, which I would be happy to do to circumvent this problem). I'm pretty sure Cathwenna's company would appreciate the peaceful outcome as well. After all they'd be 6k richer and, well, alive.