In the longest and most emotional scene of the play, Antonio faces trial for Bassanio's loan. The Duke of Venice greets expresses pity for Antonio, calling Shylock an inhuman monster who can summon neither pity nor mercy. Antonio declares that he is ready to suffer quietly. He knows that the Duke has done everything he can within the law to help him.

The Duke summons Shylock into the courtroom and addresses him, saying that he believes that Shylock means only to frighten Antonio by extending this drama. Shylock is adamant, however; he wants the penalty of a pound of flesh as repayment for the three thousand ducats. Shylock offers no explanation for his insistence. Shylock hates Antonio, and for him that is reason enough.

Bassanio attempts to reason with Shylock but he fails. Antonio tells Bassanio that he is wasting his time. He himself asks for no further pleas; he begs that judgment be quickly given. Bassanio cannot believe that his friend is serious. He offers six thousand ducats, but Shylock refuses. When the Duke asks Shylock how he expects to receive mercy when he offers none, Shylock replies that he has no need for mercy, as he has done nothing wrong. He compares his wanting of flesh to the slave-owning Christians who were unwilling to free the Jews.

The Duke announces that he has summoned Doctor Bellario, a lawyer, to come and make a judgement. This case is too much for one man to render a single opinion on; therefore, Shylock's demand for judgment will have to wait, and he will have to cease his demand or else the court will be dismissed.

Bassanio tries, without much success, to cheer up the despairing Antonio, vowing that he himself shall give Shylock his own life in place of Antonio's.

Nerissa enters the courtroom disguised as a lawyer's clerk, giving the Duke a letter from Doctor Bellario. As the Duke reads the letter, Shylock sharpens his knife on the sole of his shoe to the horror of Antonio's friends. The Duke announces that Doctor Bellario is ill and cannot come to court and that he has sent a young lawyer named Balthasar as his replacement.

Portia enters, disguised as Balthasar. The Duke welcomes her and asks whether she is familiar with the circumstances of the case. Portia answers that she knows the case well, and the Duke calls Shylock and Antonio before her. She asks Antonio if his bond is a valid one, and he admits that it is. She then tells him that Shylock must be merciful. This shocks Shylock and in one of the most famous speeches in the play, he questions why he must be merciful.

She continues and says that mercy is an attribute of God. It is freely bestowed to temper justice, and those who grant mercy ennoble themselves, especially those people who have the power to dispense punishment and yet award mercy instead. Shylock brushes aside her speech, however, by reiterating his demands for justice and revenge.

Portia asks whether Antonio is able to pay the money, and Bassanio offers Shylock twice the sum owed and he is willing to pay the bond ten times over, or with his own life. Bassanio begs the court to bend the law, reasoning that such a small infraction is a little wrong for a great right. Portia pronounces that Venetian law is indeed binding. Thus, Antonio's bond is legal, and Shylock can collect the pound of flesh.

Portia orders Shylock to have a surgeon on hand to prevent Antonio from bleeding to death, but Shylock refuses because it wasn't stated in the terms of the loan. Antonio says goodbye to Bassanio, telling him not to mourn for his death. Both Bassanio and Gratiano say that they would give up everything, including their wives, in order to save Antonio. Portia and Nerissa mutter that they are unlikely to appreciate such sentiments.

Shylock is impatient to start taking his pound of flesh, but is interrupted by Portia. She says their loan stipulates a pound of flesh only, and nothing else. She urges Shylock to continue collecting his pound of flesh, but reminds him that if a drop of blood is spilled, then he will be guilty of conspiring against the life of a Venetian citizen and all his lands and goods will be confiscated by the state.

Shylock realises that he has been foiled, saying that he is now willing to take Bassanio's offer of three times the amount of the bond. However, Portia denies him this, saying he can only have the pound of flesh.

Portia reminds Shylock of the penalty that non-citizens face when they threaten the life of a Venetian. In such a case, half of Shylock’s property would go to the state, while the other half would go to Antonio. She tells Shylock that she has seen sufficient proof that Shylock seeks Antonio's life both directly and indirectly and tells him to beg for mercy from the Duke.

The Duke declares that he will show Shylock mercy, sparing his life and asking only for a fine. Shylock says that they may as well take his life because it is worthless without his money. Antonio also shows him mercy, offering to return his share of Shylock’s estate on two conditions: Shylock converts to Christianity and gives all of his money to Jessica and Lorenzo upon his death. Shylock agrees and leaves the court.

The Duke invites the young lawyer to dinner, but Portia declines. She also declines Bassanio's offer of three thousand ducats as her legal fee. Bassanio and Antonio insist that she take something so they can show their gratitude. Portia finally agrees and asks for Antonio's gloves and Bassanio's ring. Bassanio says she can ask for anything except the ring. It was a present from his wife, who made him promise never to part with it. Antonio urges Bassanio to give her the ring.

Bassanio gives in and sends Gratiano to run after Portia and present her with the ring. Antonio and Bassanio then leave for Antonio’s house to plan their trip to Belmont.