Find Palmerin and ask him to take you to the duchess.
Defeat the Shaelmaar.
Exit the cellar, optionally find Roach nibbling on some grass, and ride him roughly southward and southwestward, up the hill to the Tourney Grounds. Weave your way past the peasantry, and locate the knight telling stories to a small group of urchins.
The story of Riddick and the dragon will have to wait; Palmerin shoos the children away, but only after mentioning your help in defeating the giant named Golyat. One of the inquisitive tykes asks if virtue always trumps villainy. Answer how you wish:
Answer “Virtue always triumphs,” to result in the children mocking you slightly.
Answer “The stronger wins,” though this isn’t the best way to influence small minds.
Answer “Not always,” to hedge your bets, and answer most truthfully.
Your audience with the Duchess will have to wait too; the festivities at this location are about to begin with an arena battle. You’re taken aback to see a large and confused Shaelmaar (a gift from the emperor) being prodded into its pen. Answer Palmerin as you wish regarding the danger or torture of the animal. Ask who will fight the Shaelmaar if you wish; Palmerin explains it is Guillaume, who was out of his depth against the giant when you first met him. This won’t end well.
Indeed, it doesn’t. After what appears to be a victory, Guillaume makes what could be termed a ‘tactical misstep,’ forcing you and Palmerin into the fray to save his life. Again. Prepare to face the Shaelmaar yourself, since Palmerin will quickly be knocked down by the creature.
After the beast has been toppled, you have the following option. You can:
Kill it.
Spare it.
Choose the latter, and pikemen come in to keep it from getting up, while you’re awarded the title “Geralt the Merciful” from the bard (an unofficial title). This fulfills the virtue of mercy for the Lady of the Lake quest.