Legitly speaking....it is PART OF THE STORY AND THERE IS NO WAY OUT OF THIS....well...except......
SPOILER:
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For the Test of Selflessness, make sure you enable cheat, then after the demon take a random party member or peasant (if you solo), move your mouse cursor to the end of the map where the demon is standing, and hit [ctrl] + [J] with only your character selected. Once you are in the area where the demon and the hostage is, talk to the demon, the hostage lives and you get your Bhaal's Tear. When you leave that room, select your character and the NPC (if not soloing) and move the mouse cursor back to the entrance/exit of the area and hit [ctrl] + [J] again, there...no penalties taken and mission accomplished....
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Long live H22A1!!!!!