The snag there is that you either need to dump the object somewhere or the next battle is going to be "No quarter", which might not be to your advantage. If you have dumped it, you then need to retrieve it to switch to "No quarter" mode - and you can't go to your cabin in the middle of a battle. If it's a special object which can be activated by command, similar to the glowing orb in the battle against the Black Pearl at the end of "Tales of a Sea Hawk", then you're back to having to add a command. In that case you don't need the object, you just add the command.Possibly carry an object on the character that causes it? Maybe just have that object in their inventory to check for.
Don't forget that one of the options in the dialog with the captain is "I'll cut you all down like pigs! That is my final decision!" If you want to show no quarter, that's how to do it at the moment.
Otherwise, if anybody else wants to implement the effect of a red flag, another way in might be that if you are currently flying a pirate flag, replace the "Hoist pirate flag" icon and command with a "No quarter!" command.