Charles and Dolly are in a fight – or rather, Charles is berating Dolly for the situation the Wilcoxes are in. He blames her not only for Evie's coming marriage to Percy, but also for Mr. Wilcox's marriage to Margaret.
Charles assumes that Margaret was just out to get Howards End, and fatalistically thinks that she's accomplished her goal.
Dolly calms him down, and calms down the baby, who's upset by this parental strife. Charles subsides, muttering something about keeping an eye on "these Schlegels."