Near Olivia's house, Feste runs into Sebastian, whom he mistakes for Cesario. Feste asks Sebastian to return and speak with Olivia. Confused, Sebastian offers Feste some coins to leave him alone. Feste is about to run off with the money when Sir Andrew appears, trailed by Sir Toby and Fabian. Sir Andrew punches Sebastian. Stunned for a moment, Sebastian then punches Sir Andrew back, asking "are all the people mad?" (4.1.24) in Illyria. Feste rushes off to tattle to Olivia. Sir Toby and Sebastian begin to fence.
Viola's disguise continues to create confusion, even chaos. Here, Sebastian's real confusion about whether everyone is crazy replaces all the flowery language of love and valor. With the physical comedy of the fist fight, things go really topsy-turvy...
Olivia rushes in, ordering Sir Toby to stop. Olivia sends Toby away, while begging "Cesario" (in fact, Sebastian) not to be offended. Once Sir Toby, Sir Andrew, and Fabian have sulked off, Olivia apologizes profusely to "Cesario" and asks him to return with her to her house. Sebastian fears that he is mad or dreaming, and yet he is also overwhelmed by attraction to Olivia. If this is a dream, he says, he would like to keep on sleeping! He accepts the invitation and leaves with Olivia.
Olivia's passion contrasts comically with Sebastian's befuddlement. His repeated questioning of whether he is literally crazy recalls the tendency of Orsino and Olivia to speak this way in their love-melancholy. Yet, Sebastian seems far more pragmatic than they are—if a rich, beautiful lady loves him, he won't resist by playing games.