First off: I don't mean no disrespect. There are always several ways of handling things and many conceptions of what is right and how it should be done. The following is written with the sole intention to ignite thoughts and to clarify what has possibly been interpreted as poor RP (on the side of a misunderstood paladin and the player behind the keyboard).
Playing a paladin comes with a more or less clearly defined code of conduct. The rough outline is probably obvious to most: Defend the widows and orphanes! Smite evil wherever it shows its hideous skin! Fight darkness, drive back the shadows and hold high the banner of light and justice so that Tyr/Lathander/Helm may smile proudly upon their chosen warrioress in their sacred Halls in the heavenly heights (and maybe drink an ale or two to congratulate themselves on this glorious offspring of their wisdom and struggle against the Dark Lords).
And to help their chosen ones to fight the armies of undead they have granted them the ability to detect evil in whatever shape and manifestation: Detect Evil! And hence the paladin (having this crafty ability quickslotted) narrows his eyes at the wizard standing in front of her: "You are a creature of vile darkness! I shall smite you on this spot, or die in the attempt! For your true intentions I know, and nothing good will provene from it!" (and she raises her blade to strike him down).
The proud and conservative dwarven warrior, the fun-loving (and deep in his halfling-soul: chaotic good) hin and the (neutral good and faithful) cleric of Lathander who happened to have been recruited by said (evil) wizard form a protective circle around the wizard: "Ho, hold milady! He seeks to find out the source of the animatrons in the ruins, who have attacked the city and cost many a life in this city. My brother, in fact fell pray to those vile aberrations and..."
(The paladin, briefly considering to strike down the hin as well, as he appears to be a servant of darkness at this moment, turns red and announces (shrieking by now) : )
"You are blinded by his kind words. His motives are corrupted!" [and, while having no clue about the background or the true motives of the wizard, proclaims: ] "Step aside, for I shall smite him here so that the Dark Lord may feast upon his soul!"
And after the guards have intervened and the raving knight in the service of her Lord (of Goodness) is being fed dry bread and water in some cell in the local prison, the dwarf, the hin, the cleric and the wizard set out to defeat the animatrons. The paladin, in the meanwhile, (in the cell) is smiled upon by her god, for not siding with evil.
For argumentation's sake, let us assume that the troup apparently warded off the threat to the city, eliminating tons of animated steel and rock (Oh joy!) but in the last room, they found the ultimate Swirvneblin control to call the evillest of all biggest animatrons - the control the Wizard has been seeking over the last two decades, all the time pretending to be a loyal servant to Sanctuary - and the wizard...
What am I getting at?
1. Evil differs in as to how the players creating evil PCs perceive it.
One player might choose evil to serve Bane. Another might choose it, because the PC is selfish (and in the player's moral code of conduct this accounts as evil) - maybe prone to promises and whispers from the Underworld.
2. What is evil? (a highly philosophical question)
Luckily (at least in my perception) evil and good are more or less clearly defined in a fantasy setting. Serve good, light, justice? -> Good. Serve Darkness, kill the innocents, pray nightly to Bane and sacrifice small children to see into the future? -> Evil.
And then there are the cases inbetween. If gods are worshipped and involved, it should be relatively easy for a paladin to detect the evil (and abstain from it: e.g. the Cleric of Bane seeking to invoke his master and grant him a physical presence on this plane). A zombie is obviously a creature of darkness and evil. -> Smitten!
If there is not much metaphysics involved (the typical goblin who just happens to be evil by nature and has no clue about who it is serving and why) still gives our paladin an easy-to-followmoral conduct: Goblin? -> Evil by nature -> To be smitten! [What about the goblins in Sanctuary. Goblins, Orcs, Bugbears, etc. are undoubtedly evil races. Hells, the paladin (player) looks away as to not interrupt the server and to stay alive]
... and then there are those great RPer's - who play evil PCs. Subtely. Not evil on the surface, but deep inside. It is those PCs that make the life of a paladin interesting. The perfect antagonists: They are evil, but clever - so it is fun to RP and interact with them. They do not run around proclaiming they want to invoke the Seven Demons of Azmodeus, but follow their (evil) goals subtely.
And the paladin (while the player knows they are evil with the quick-slotted Detect-Evil-Tool) notices something afoul with them (great evil-guys-RPers) and their motives. Deep inside she knows. Yet the reasons the evil one brings forth to recruit her makes sense. The dwarf, the hin, and the cleric of Lathander are doubtlessly not evil - the cleric has proven her 'goodness' on various occasions. Should she dismiss it all and refuse to have anything to do with that shadowy wizard? Should she let the (naive) cleric, the (not-wanting-to-know) dwarf, and the (careless and worry-free) hin run into their doom with that untrustworthy wizard?
The bottom line is: Some players are great at playing evil subtely. A paladin's life would be boring without evilness about. Accepting and/or refusing a quest/company might be the result of a complex red of motives, and while the example above might well appear a bit 'constructed' there are many more (and more believable ones) where there might be a good reason for a paladin (or a good-aligned cleric) to suddenly find herself in a group with one or more evil PCs. [History is full of such examples]
So, to bring my lengthy post and pladoyer to a conclusion: Please, grant the players of paladins a bit of freedom and consider the possibility they are mature and consciously aware of what they are doing (and that they not do it solely for the phat-loot and XP).
There are certainly a lot of things that merit a paladin to instantly become fallen, but travelling/adventuring with one evil PC in the party should not be one in my book. Maybe they are seeking to create adventures, stories and RP that are the stuff of legends. *smiles*