The day after seeing Miles out on the lawn, the governess speaks privately with Mrs. Grose about what had happened. Before describing what she says to Mrs. Grose, though, the governess spends time describing how willingly Mrs. Grose would always listen to what she had to say. The governess says she recognized in Mrs. Grose the recognition of the governess’s “superiority”.
The governess highlights here an important aspect of her relationship with Mrs. Grose. Throughout the book Mrs. Grose goes along with what the governess says, apparently unquestioningly. This does not imply a trusting relationship, though—only a one-sided relationship. It may be that this one-sidedness is due to Mrs. Grose's sense of the governess's superiority; or it may be that Mrs. Grose is withholding her true thoughts.
The governess then describes what she says to Mrs. Grose about her encounter with Miles. After seeing him out on the lawn, the governess went outside to the terrace. Miles then came to meet her on the terrace, and the two wordlessly went inside. The governess says she saw this as an opportunity to challenge Miles’s presentation of himself as an always well-behaved young gentleman. But she mentions that she wanted to approach the subject lightly, in a way that was “thoroughly kind and merciful.”
The governess sees this as an opportunity to make Miles confess that his youthful and innocent external appearance is, at least to a certain degree, a deception. But the governess’s desire to be kind and merciful shows that, even when confronted with evidence, she cannot treat Miles as anything but an innocent thing to be protected.
In response to the governess’s question about why Miles had been outside, Miles said that he wanted her to think of him as “bad.” He said “bad” cheerfully, and after his confession he leaned in to kiss the governess. The governess embraced him, suppressing the urge to cry. Finally, Miles admits that he and Flora had conspired to set up this whole scenario: she stood looking out the window so that the governess would also look out and see Miles standing there. At the end of their conversation, the two embraced, and the governess calls the whole scenario a “joke.”
This scene is an important example of the kinds of ambiguities that make the characterization of these children so tricky. It isn’t clear here how “bad” Miles wanted to seem, nor is it clear why he wanted to seem bad. The governess treats him like an innocent child here when she embraces him, but this treatment is inconsistent with her occasional suspicions that he is not so innocent as he seems.