Question: Why is Master Li evil at heart and why does he hold a grudge against Mr. Han? Also why isn't he on speaking terms such as the peace offering by Mr. Han?
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Answer: Master Li is based on John Kreese from the original Karate Kid film, and much like Kreese the reasons for his behavior are never fully explained. It is only vaguely mentioned in The Karate Kid Part 3 that Kreese and Terry Silver's martial arts instructor taught them their philosophy on fighting: strike first, strike hard, no mercy. It is reasonable to assume that Master Li learned his behavior from whoever taught him Kung Fu. Master Li holds a grudge against Mr. Han because Mr. Han "attacked" his students. He doesn't accept Mr. Han's peace offering because he views this as a sign of weakness, which he despises.
BaconIsMyBFF
The grudge is based on Sato and Chozen Toguchi from Part II (1986).
In what way? Sato had a very personal, openly stated reason for his grudge against Miyagi. There is no such indication that Mr. Han and Master Li had ever so much as heard of one another.
BaconIsMyBFF