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It all starts at a big, high-culture party. The wine is flowing, the lights are flattering, and the diamonds are twinkling. Sir Robert and Lady Gertrude Chiltern, rising star couple on the political scene, greet the Who's Who of 1890s London as they mill about delivering bon mots. The surprise main event is the arrival of Mrs. Cheveley. She's one of those women that gets talked about; she looks outrageous and radiates menacing charm. It turns out that both Lady Chiltern and Lord Goring, the dandified philosopher in the play, know this lady from days gone by. They're not fans. But Mrs. Cheveley doesn't care – she's not here for fun or friendship.
As everyone goes in to dinner, Mrs. Cheveley sits Sir Robert down and informs him that unless he reverses his public position on the Argentine Canal she's invested in, she will blackmail him. She has a letter proving that as a young man, he built his fortune on the sale of state secrets. She will happily show it to the press.
Sir Robert freaks out and agrees to do what she wants. When Lady Chiltern finds out about his change of heart – not knowing anything about the blackmail, or about Sir Robert's past missteps – she pressures him to go back on his promise to Mrs. Cheveley. She won't allow him to compromise his principles.
So Sir Robert is caught between a rock and a hard place. If he does what Mrs. Cheveley wants, he'll lose his wife. If he doesn't do what Mrs. Cheveley wants, he'll be exposed, losing his position – and probably his wife, too. Lord Goring thinks he should come clean to Lady Chiltern, but Sir Robert doesn't have the chance. Mrs. Cheveley calls to inquire about a brooch she lost at the party. Lady Chiltern doesn't have it. (Lord Goring does; he recognized and collected it the night of the party.) Irritated by Lady Chiltern, Mrs. Cheveley reveals Sir Robert's past: he built his fortune on a crime. Lady Chiltern attacks Sir Robert and says she can't love a dishonest man. He counterattacks that she should never have put him on a pedestal, that no man could survive her idealistic love.
Lord Goring now goes into rescue mode. At home getting ready for a party, he's visited by his father, Mrs. Cheveley, and Sir Robert – none of whom he expected. Only Lady Chiltern had written a letter on pink paper asking him to expect her. When Sir Robert arrives, pleading for help, he discovers Mrs. Cheveley there and accuses Lord Goring of siding with her. In reality, she has proposed marriage to Lord Goring in exchange for Sir Robert's incriminating letter. Lord Goring refuses – he's disgusted with her for seeking to destroy the love of a good couple.
When Mrs. Cheveley inadvertently reveals that she visited Lady Chiltern on account of a brooch, Lord Goring traps her. He knows she stole the brooch years ago and he will call the police unless she gives him the letter about Sir Robert. She does. But she has one more trick up her sleeve. She steals the pink letter (from Lady Chiltern to Lord Goring, announcing her visit) and promises to send it to Sir Robert as evidence of an affair.
Lord Goring visits the Chilterns to reveal that the Baron Arnheim letter (i.e., the letter Mrs. Cheveley threatened to use to expose Sir Robert) has been destroyed. Lord Goring also comes to propose to Mabel Chiltern, Sir Robert's younger sister. He warns Lady Chiltern that Sir Robert may receive a letter that incriminates her. Fearing ruin, Sir Robert is so relieved at his escape from the situation with Mrs. Cheveley that he proposes retreating from public life. Lady Chiltern eagerly agrees. When Lord Caversham (Lord Goring's father) arrives with the news that Sir Robert can have a place in the Cabinet (a government position), his resolve is tested. Sir Robert will reject the post.
Left alone with Lady Chiltern, Lord Goring begs her not to ask such a sacrifice of her husband. She should forgive him, and accept that her job is to support her husband no matter what. She agrees. When Sir Robert returns with the letter rejecting the appointment, she tears it up. They kiss and reconcile.
Lord Goring asks for Mabel's hand in marriage, and Sir Robert says no. He still thinks Lord Goring is involved with Mrs. Cheveley. Now Lady Chiltern must come forward and confess that it was she, not Mrs. Cheveley, whom Lord Goring expected at home last night. Everyone makes up, Mabel enters, and the couples promise to love each other in a realistic way, instead of idealizing each other.