Unforgiven begins with a vista shot of a man digging a grave, back lit by the setting sun in the prairie lands of Kansas. A single guitar slowly plays as a title card explains how a good and respectable woman by the name of Claudia went against her family and married the notorious criminal and alcoholic William Munny. It further states that she died unexpectedly in 1878 from smallpox, and not at the hands of her husband as many thought she would.
The film then jumps to the year 1881 in Big Whiskey, Wyoming. Two cowboys, Quick Mike and Davey-Boy, disfigure a prostitute by cutting her repeatedly with a knife. Delilah, the prostitute, made the mistake of committing an unforgivable crime, laughing at the sight of a small penis. The two men are detained at gunpoint by the owner of the whore house, Skinny Dubois, while the local sheriff, Little Bill Daggett is summoned to sort this situation out.
Little Bill, played to Academy Award perfection by the great Gene Hackman, is a no nonsense sheriff, and former gunfighter, who does not tolerate lowlifes or guns in his town. After assessing the situation, Little Bill decides not to punish the men via a whipping, but instead assesses the men a fine of five ponies to be paid to Skinny for the loss of his property. The rest of the prostitutes, led by Strawberry Alice, are infuriated by this leniency and offer a $1,000 reward to whoever can kill the cowboys.
The film then returns us to the Munny farm in Kansas. A gunfighter by the name of the Schofield Kid comes looking for Will to seek the former killer’s assistance in collecting the prostitute’s bounty. The Kid, an arrogant and short tempered young man, finds Will struggling with his pig farm that the former gunfighter runs with his young son and daughter. However, Will is a repentant widower who has forgone his murderous ways in order to raise his two children.
Additionally, Will has given up the sinful alcohol which used to lead to his killing sprees. Though Will initially refuses to help, his pigs are catching “the fever” and his farm is failing, putting his children’s future in jeopardy. Will reconsiders a few days later and sets off to catch up with the Kid. On his way, Will recruits his friend Ned Logan, another retired gunfighter played by Morgan Freeman. The trio soon set out to Big Whiskey with a pact to divide the money up three ways.
Meanwhile in Big Whiskey, a British-born gunfighter English Bob, and old acquaintance and rival of Little Bill, comes to town to seek the reward as well. Bob brings a writer, who is working on a biography of notorious gunfighter who made his name by killing Chinamen. After Bob lies to a deputy and refuses to turn over his firearm, Little Bill and his deputies disarm Bob, which entails taking Bob’s guns and beating the gunfighter severely in the public street.
Little Bill wishes to make an example of Bob so that no other would be assassins come to town looking to collect the whore’s prize. The next morning Little Bill throws Bob out of town, but the writer Beauchamp decides to stay and write about Bill, who has impressed him with his tales of old gunfights and seeming knowledge of the gunfighter’s psyche.
Will, Ned, and the Kid arrive later that day during a rain storm. The trio head into the saloon/billiard hall/brothel to meet with the prostitutes and discover the cowboys’ location. While Ned and the Kid take out a couple of advances on their reward by sleeping with the prostitutes, Will sits in the bar alone suffering from a bad fever after riding in the rain. Little Bill and his deputies confront and corner Will, who is hopelessly outnumbered. With no idea who Will is, Little Bill once again disarms the gunfighter and severely beats Will, while Ned and the Kid make their escape out the back.
After Little Bill finishes his beating on Will, he allows the feverish gunfighter to crawl out of the bar and ride out of town. The trio regroups at a barn outside of town, where they nurse Will back to health with the help of Delilah, who appears to begin to have feelings for the recovering Will. She is very grateful and offers herself to Willy hoping he will take an advance on his reward, but Will politely explains to her about his love and faithfulness to his dear departed wife, and how they both now share something in common, they both have scars. Will reveals a soft side to Delilah, and confesses that if he were to want an advance, he would gladly choose her over any of the other girls.
Three days later, the trio ambushes a group of cowboys and is able to kill Davey-Boy, the less culpable of the two cowboys. While the cowboy slowly dies from a gut shot, it is revealed that Ned no longer has the stomach for murder and does not wish to be a part of this any longer. Ned decides to return home while Will and the Kid finish the job and kill the other cowboy. However, a posse made up of other cowboys from the ranch captures Ned and brings him to Little Bill. Little Bill tortures Ned in hopes of getting information on Will and the Kid. Ultimately, Ned is killed by the torture that Little Bill inflicts upon him.
Meanwhile, Will and the Kid head to the cowboys’ ranch, where the Kid ambushes Quick Mike in an outhouse and kills him. After they make their escape, a distraught Kid confesses he had never killed anyone before and reveals his sorrow in what he has done. He renounces his life as a gunfighter and tells Will that he can have the money. When one of the prostitutes rides out to give them their reward, they learn of Ned’s capture and death at the hands of Little Bill.
She tells Will that at the end, Ned ultimately revealed Will’s identity to Little Bill. The Kid heads back to Kansas to deliver the reward money to Will’s children and Ned’s wife, while an embittered Will — finishing the Kid’s bottle of whiskey — returns to town to take revenge on Little Bill.
That night, Will arrives and sees Ned’s corpse displayed in a coffin outside the saloon with a sign reading “this is what happens to assassins around here”. Inside, Little Bill has assembled a posse to pursue Will and the Kid. Will walks alone into the bar like a ghost. He quickly kills an unarmed Skinny for daring to display Ned’s body outside his bar. Will explains to Little Bill that he has come to kill him for what he did to Ned, and in retort Little Bill commands his deputies to shoot Will down after the pig farmer shoots at him.
After Will’s gun misfires, a wild gunfight ensues that leaves most people in the bar dead. Amazingly, Will remains uninjured. Will approaches a wounded Bill and executes him with a headshot at close range. Will then threatens the townsfolk before finally leaving Big Whiskey, warning that he will return for more vengeance if Ned is not buried properly or if any of the prostitutes are harmed. The elderly gunfighter then rides off into the rainy night. A title card epilogue ends the film by stating that Will moved to San Francisco with his children where he prospered in dry goods.