Irish sailor Michael O'Hara meets the beautiful blonde Elsa as she rides a horse-drawn coach in Central Park. Three hooligans waylay the coach. Michael rescues Elsa and escorts her home. Michael reveals he is a seaman and learns Elsa and her husband, disabled criminal defense attorney Arthur Bannister, are newly arrived in New York City from Shanghai. They are on their way to San Francisco via the Panama Canal. Michael, attracted to Elsa despite misgivings, agrees to sign on as an able seaman aboard Bannister's yacht.
They are joined on the boat by Bannister's partner, George Grisby, who proposes that Michael "murder" him in a plot to fake his own death. He promises Michael $5,000 and explains that since he would not really be dead and since there would be no corpse, Michael could not be convicted of murder (reflecting corpus delicti laws at the time). Michael agrees, intending to use the money to run away with Elsa. Grisby has Michael sign a confession.
Welles as Michael O'Hara in The Lady from Shanghai (1947)On the night of the crime, Sydney Broome, a private investigator who has been following Elsa on her husband's orders, confronts Grisby. Broome has learned of Grisby's plan to murder Bannister, frame Michael, and escape by pretending to have also been murdered. Grisby shoots Broome and leaves him for dead. Unaware of what has happened, Michael proceeds with the night's arrangement and sees Grisby off on a motorboat before shooting a gun into the ground to draw attention to himself. Meanwhile, Broome, mortally wounded but still alive, asks Elsa for help. He warns her that Grisby intends to kill her husband.
Michael makes a phone call to Elsa, but finds Broome on the other end of the line. Broome warns Michael that Grisby was setting him up. Michael rushes to Bannister's office in time to see Bannister is alive, but that the police are removing Grisby's body from the premises. The police find evidence implicating Michael, including his confession, and take him away.
At trial, Bannister acts as Michael's attorney. He feels he can win the case if Michael pleads justifiable homicide. During the trial, the incompetent judge quickly loses control of the proceedings. Bannister learns of his wife's relationship with Michael. He ultimately takes pleasure in his suspicion that they will lose the case. Bannister also indicates that he knows the real killer's identity. Before the verdict, Michael escapes by feigning a suicide attempt (swallowing pain relief pills Bannister takes for his disability), causing a commotion in which he slips out of the building with the jury for another case. Elsa follows and she and Michael hide in a Chinatown theater. Elsa calls some Chinese friends to meet her. As Michael and Elsa wait and pretend to watch the show, Michael realizes that she killed Grisby. Michael passes out from the pills he took just as Elsa's Chinese friends arrive; they carry the unconscious Michael to an empty fun house. When he wakes, he realizes that Grisby and Elsa had been planning to murder Bannister and frame him for the crime, but that Broome's involvement ruined the scheme and that Elsa had to kill Grisby for her own protection.
The film features a unique climactic shootout in a hall of mirrors involving a multitude of false and real mirrored images in the Magic Mirror Maze, in which Elsa is mortally wounded and Bannister is killed. Heartbroken, and ignoring Elsa's pleas to save her life, Michael leaves presuming that the events which have unfolded since the trial will clear him of any crimes. He contemplates, "Maybe I'll live so long that I'll forget her. Maybe I'll die trying."
