Instructions
Walk into the tent and talk around to learn about the Hero Contest. Go to the desk and sign up.
After meeting and talking to Haschel, tell the man outside of the arena that you are ready to fight. (You'll have to do this for each round. Note that you'll start every round with maximum health points.)
Defeat Gorgaga, Serfius, Danton and Atlow to set up the final battle against Lloyd.
Battle Lloyd by choosing any form of attack you desire. Lloyd will constantly dodge each attack and respond with powerful attacks of his own. The best strategy to defeat Lloyd, as opposed to other competitors in the Hero Contest, is to equip one of your characters with the Talisman accessory, which prevents instant death (although Lloyd can kill your characters while in "Dragoon" mode, you can still use them). This will protect you from Lloyd's attacks. You can either use three Talismans if you have them, or "Dragoon" mode when your SP drops to 100, which will enable you to hit Lloyd, then evade his attack. Alternative strategies are to evade Lloyd's attack without taking too much damage, or to let Lloyd hit you while guarding, thus minimizing the damage he does to you.
Whichever strategy you choose, continuously guard against Lloyd's attacks and respond with your own. Although you can defeat Lloyd, you cannot kill him, so after a period of battle, the combat will automatically end. The key to the third strategy is to wait until your hitpoints are depleted while attacking and defending; the contest will still end without death for either competitor, and it's your survival that allows you to defeat Lloyd.