Upon rejecting Loredo and winning the fight, the commandant makes a few ominous threats and has his guards escort Geralt to the gate.
Just before the final bout, Loredo tries to bribe Geralt to throw the fight. There Geralt can fight some new, tougher opponents. From there he leads the witcher to commander Loredo's secret fight club behind his residence. After winning two fights King Ziggy appears to speak to Geralt suggesting that they meet outside, in front of the inn. The sidequest starts automatically after the quest One on One: Flotsam.