Characters spotted will be listed in the location report:
Seen here: Fighters of Pelenth , "carrying a gold banner" Osswid the Constructor 
All characters listed as being seen in the location may interact without requiring any travel. Thus, the Fighters of Pelenth and Osswid are considered to be in essentially the same place.
This is true whether the characters are in a province, a city, a ship, an inn, or some other sub-location.
However, a character in a sub-location may not interact with characters in the surrounding area. A noble in the city must first enter the inn before he may interact with those inside.