NPC stands for Non-Player Character and are avatars controlled by an AI program as opposed to being controlled by a player.
The most common occurrence are avatars standing throughout the world, such as in cities or on your ship. These often offer Missions but can also offer some dialog or are simply eye candy.
The other variant are most avatars you encounter during Avatar Combat instances. These might engage you in swashbuckling if they are hostile or help you if they are friendly.
See Category:NPC for a list of known NPCs.