The scene opens on the street in front of Olivia's house. Sebastian and Feste are talking, and we realize that Feste has mistaken Sebastian for Cesario. Feste insists that his mistress has sent Feste to him, meaning Cesario. Sebastian is annoyed at the jester's persistence; "Thou art a foolish fellow," he says, and gives him a generous tip to send him on his way — or else he will give Feste "worse payment," meaning a kick in the rump if he doesn't leave him in peace.
Sir Andrew, Sir Toby, and Fabian enter, and Sir Andrew assumes that Sebastian is the "cowardly" Cesario; Sir Andrew strikes him, whereupon Sebastian promptly beats Sir Andrew, asking, "Are all the people mad?" Feste says that he is going to report to Olivia all that has happened, and she will not be pleased to learn that her favorite suitor, the reluctant Cesario, has quarreled with Olivia's uncle and with Sir Andrew. Sir Toby, meanwhile, decides that it is time for him to act; he grabs the young upstart (Sebastian) by the hand in an effort to save Sir Andrew from greater injury.
Olivia arrives, assumes that Sebastian is Cesario, and pleads with him to go into the house. She severely reprimands Sir Toby and sends him away, out of her sight, and he exits, taking the other two with him. She apologizes for the "pranks of [these] ruffians," and while she is talking, Sebastian is speechless. He cannot believe what is happening: he is being wooed in the most ardent of terms by a beautiful young countess; if this be a dream, he says, "let fancy still my sense in Lethe . . . let me sleep." Olivia is insistent: "Come, I prithee," she says, and begs him to marry her. Without hesitation, Sebastian accepts: "Madame, I will," he says, and off they dash to look for a priest to perform the ceremony.
This scene begins by re-emphasizing the comic ramifications inherent in the various mistaken identities and disguises. Feste has been sent by Olivia to Cesario (Viola) to deliver a message, but he delivers it to Sebastian, because Viola's twin brother looks exactly like her. Thus this is the first case of a very natural and very understandable case of mistaken identity; the comedy here lies in the fact that Sebastian does not know what Feste is talking about, and Feste feels that "Nothing that is so is so." They talk at cross purposes, and we (the audience) know why. This is yet another case of dramatic irony used for a delightful comic effect.
Even more comic, however, is the fact that Sir Andrew, an innate coward, is convinced that Cesario (Viola) is frightened of him — which is actually true. However, this man is Sebastian, and thus this is a completely different matter. Consequently, when Sir Andrew begins striking Sebastian, Sebastian returns the blows double-fold until Sir Toby has to restrain Sebastian. Again, the comedy here derives in large part from the stage action coupled with the comedy of mistaken identities — a theme that is now almost absurd.
When Olivia arrives and discovers her uncle physically "man handling Sebastian, whom she thinks is Cesario, her anger at her uncle will affect the comic subplot against Malvolio because Sir Toby will be out of favor with his niece and will no longer feel the freedom to torment her steward.
By the time that Sebastian has been mistaken by Feste, then beaten by Sir Andrew, then restrained by Sir Toby, and then addressed in terms of soothing and passionate love by a beautiful noble lady, whom he has never seen, the youth is ready to believe that he is in the strangest country of the world, or else he has gone mad. In contrast, Olivia is delighted at the sudden turn of events; she believes that Cesario (Viola) finally loves her.