Kerwin's self image issues continue as, even when Eston has been utterly defeated, he continues to look for ways to "outsmart" the terms of the unconditional surrender of his realm. Did he really think that appointing Cyrillos as Duke of Belegrond would be tolerated by someone like Elroy? You missed the back story, but Elroy let his only friend Zak die in order to make sure Arturius was emotional enough to break away and form Rieleston. He is heartless, and acting on his own personal vendettas right now.
Outsmart the treaty? There is nothing to outsmart, so I'm unsure what you mean. And Kerwin appointed Cyrilos because he is one of Kerwin's closest confidant's and advisers, and that's usually how appointments work. Kerwin gave zero consideration to how some bandit in the night felt about it. Honestly, I'm not sure why Elroy cares, his ilk succeeded in their rebellion and succeeded in crippling Eston, I'm not sure what more he really wants.
