Yea that sword is not that great and as was said I'd rather retain the 5 skill points that Kenneth needs for a upgrade with that book over the sword.
I don't know if this is random but I had them fight it out and Hermosa literally kicked the guys butt in just one flurry of hits so the best choice came out to win for me.
Had the blacksmiths do their competition as well and the alcoholic guy won but he did make the best sword so I picked him anyways. I used that sword till the end of the game in my off hand with duel wielding.
TIP: If dual wielding switch your weapons around from hand to hand and watch your damages and stats, one way is always way better then the other even if you have the dual wielding skill up to 0% penalty for the off hand.
