Captain Vere is determined to maintain secrecy in the matter. He also has a sense of urgency about it, and feels that action must be taken immediately. He therefore convenes the drumhead court, made up of himself, the first lieutenant, the captain of marines, and the sailing master. The court meets in the same cabin where Claggart was killed.
Billy Budd is summoned, and Captain Vere testifies as to what happened. When asked to speak, Billy confirms that Vere has told the truth, but Claggart did not. Captain Vere says he believes him. Billy then says that he bore no malice toward Claggart, and is sorry he is dead. He did not mean to kill him.
Next, Billy is asked if he knew of any trouble brewing on the ship. Billy decides not to mention the incident with the afterguardsman, and replies in the negative.
The court then asks Billy why Claggart might have lied about him. Billy cannot answer this, and Captain Vere intervenes, saying that such a question cannot be answered. He also says it is irrelevant, since all the court has to consider is the consequences of the blow that Billy gave Claggart. The other members of the court are uneasy about this declaration, since it seems to prejudge the issue.
After Billy Budd declines to add anything to what he has said, he is taken away from the cabin. Captain Vere then addresses the court. He acknowledges the moral dilemma they are in. He asks whether justice demands that only the prisoner's act should be considered, and not the circumstances surrounding them. They all agree that the dilemma is whether to condemn to death a man who they know is "innocent before God." But he reminds the court that they all owe allegiance to the King, and must perform their duty according to what martial law decrees. They should not let their hearts rule their heads. He adds that adherence to martial law should also overrule private conscience.
Captain Vere goes on to say that under martial law, Billy's offense was a capital crime, that is, one that demanded the death penalty. The officer of marines interrupts him, saying that Billy Budd planned neither mutiny nor murder. The captain replies that they have to proceed under the law of the Mutiny Act, which must show less mercy than another court might do. What Billy intended, argues the captain, is irrelevant. They must consider only the act itself.
The junior lieutenant asks if they can convict but mitigate the penalty. The captain replies that even if that were lawful, it would be perceived by the crew as weak action on the part of the authorities. This would have bad consequences for discipline on the ship.
The captain then leaves the three officers alone to reach a decision. Unwilling to take a position at odds with that of the captain, they convict Billy Budd, and sentence him to hang at the yardarm in the early morning watch, which is only a few hours away.
Captain Vere himself conveys the news to Billy Budd. The narrator confines himself to offering some conjectures about what happened between the two men. He suggests the captain probably confided honestly in Billy about the nature of the deliberations of the court, and that Billy took the news calmly, as a man not afraid of dying. The two men may even have embraced.
As Captain Vere leaves Budd, he is observed by the senior lieutenant, who is startled by the look of anguish on the captain's face.
Captain Vere calls all the ship's crew together on the quarter-deck and addresses them. He tells them what has happened and that Billy Budd is to be hanged. The men listen in silence, and when he has finished, a confused murmur goes up.
Claggart is buried at sea with all the honor and ceremony his naval grade demanded.
On the upper gun deck, Billy lies in irons between two guns. No one is allowed to see him except the chaplain. He lies as in a trance, looking like a sleeping child. The chaplain comes, but when he observes Billy he decides to leave him undisturbed, since even though he is a minister of Christ, he cannot offer Billy any more peace than that which he sees already in the man's face.
The chaplain returns later, and Billy is awake. He is wholly without fear of death. The chaplain talks to him about salvation and a Saviour, but it is all wasted on Billy. He listens politely, but the chaplain's talk is too abstract to mean anything to him. The chaplain does not wish to force his attentions on Billy, so once again he withdraws, but not before kissing Billy on the cheek.
The reader will feel that Billy gets a rough deal from the court. No modern civilian court would convict a man of murder, let alone impose the death penalty, based on the evidence against Billy. At most, the charge against him would be manslaughter (since he did not intend to kill Claggart). Mitigating circumstances (the fact that Billy was falsely accused), would also be taken into account.
The reader may also blame Captain Vere for the apparent injustice suffered by Billy, since it is Vere who persuades the court to condemn Billy to death. But Vere believes he must uphold the laws of human society, and especially those of the state pertaining to military matters. There are two sets of laws, a heavenly law and an earthly law. Under the first, Billy will be acquitted. Captain Vere is aware of this. He says Billy will be acquitted at the Last Assizes, by which he means the Last Judgment, when everyone is judged by God according to their deeds. But the human world is a different matter. Vere, as the captain of the ship, is like the god of the sphere of life over which he has control. What his judgment against Billy suggests is that innocence and purity such as Billy's cannot survive in the harsh, human world.
The conundrum of whose law to obey, that of God or that of man, is brought into focus again at the close of chapter 25. The narrator comments that the chaplain is powerless to protest against Billy's sentence, since he is barred by military law from doing so. "[A] chaplain is the minister of the Prince of Peace serving in the host of the God of War." It seems that the God of War has the upper hand, at least in the case of Billy Budd.