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I can’t tell you where the mercenary Talos the Stone Fist will confront you.
I can tell you that I was around level 5 when I fought with him, and it happened in the same area as the mission Fancy Guests. So I fought him during the battle with the thugs, and the battle ended with a cutscene.
After the cutscene, I went back into the fight with Talos while he was low on health.
You might’ve encountered him sooner than this, or maybe even later. At this point in time, Talos is fairy simple to defeat.
Make sure you dodge his hard-hitting attacks and counter the other lesser attacks. Make use of your bowman-ship before Talos even gets remotely close to you.
Once the fight is over, you’ll get an Arena Invitation which starts the quest They Just Want Cruelty.