This quest has given me great consternation! Seriously though, this is how it works:

Step 1: Enter Mistwatch courtyard, kill the bandits. Okay, simple enough.
Step 2: Enter Mistwatch proper, meet with Christer, learn that he's tracked down his wife, the beautiful Fjola, to this keep. All right, things got more interesting.
Step 3: Battle the guards and meet the boss. Okay... It's the aforementioned Fjola, Christer's wife. I'm gonna kill her! But wait, she's surrendered, and wants me to tell Christer to leave. Okay, fair enough.
Step 4: Tell Christer, but wait! Your only choices are LIES! And I cannot stand lying, but I also can't stand murder... Do you see my dilemma? What do I do? What should I do? And finally, what did you do?