Sebastian is mistaken for Cesario by Feste and Sir Andrew. A brawl begins. Olivia stops it, sends Sir Toby away, and invites Sebastian inside.
Feste encounters Sebastian in the street and delivers a message from Olivia, addressing him as Cesario. Sebastian has no idea who this man is or what message he is delivering and tries to give him money to go away. Sir Andrew arrives and punches Sebastian, believing he is the coward Cesario who still owes him a response to the duel challenge. Sebastian strikes back hard. Sir Andrew retreats in shock. Sir Toby draws his sword. A brawl begins.
Olivia arrives, furious at Sir Toby, and stops the fighting. She sends Sir Toby, Sir Andrew, and Feste away and turns to Sebastian with an apology. She asks him to come inside with her.
Sebastian, astonished by this beautiful woman's warmth and confused by everything that has happened, accepts.
This scene is the structural hinge where the Sebastian plot and the Olivia plot finally connect directly. Every misunderstanding that has built up over four acts is about to converge on the same point: Sebastian's identical appearance to Cesario means that what people see when they look at him is what they have already decided they want.
Sebastian's first appearance in Illyria proper, after his brief scenes on the coast and the street with Antonio, is marked by bewilderment and readiness. He does not understand why the fool is speaking to him as though they know each other, or why Sir Andrew attacks him. He responds to both with the directness that characterises him: he tries to pay off the confusing situation and then fights back when attacked. He is not clever or manipulative; he simply reacts honestly to what is in front of him.
The brawl is the play's most physical comedy. It arrives because Sir Andrew's courage, borrowed from Sir Toby's false description of Cesario as a coward, collides with the actual Sebastian, who is not a coward at all. The result is immediate and clear: Andrew is hurt, and Sir Toby, who has spent the whole play encouraging and managing Sir Andrew's behaviour, now faces a situation he did not anticipate.
Olivia's arrival and her warmth toward Sebastian is the scene's emotional shift. From her perspective she is simply inviting Cesario into her house again, because she is in love with him. From Sebastian's perspective, a countess he has never met has sent away her uncle and her servants and is offering him her home. He is confused but not unwilling. His acceptance of her invitation is the step that will lead to their betrothal at the end of Act 4.