The play spans only the last two years of Richard's life, from 1398 to 1400. The first Act begins with King Richard sitting majestically on his throne in full state, having been requested to arbitrate a dispute between Thomas Mowbray and Richard's cousin, Henry Bolingbroke, later Henry IV, who has accused Mowbray of squandering money given to him by Richard for the king's soldiers and of murdering Bolingbroke's uncle, the Duke of Gloucester. Bolingbroke's father, John of Gaunt, 1st Duke of Lancaster, meanwhile, believes it was Richard himself who was responsible for his brother's murder. After several attempts to calm both men, Richard acquiesces and it is determined that the matter be resolved in the established method of trial by battle between Bolingbroke and Mowbray, despite the objections of Gaunt.

The tournament scene is very formal with a long, ceremonial introduction, but as the combatants are about to fight, Richard interrupts and sentences both to banishment from England. Bolingbroke is originally sentenced to ten years' banishment, but Richard reduces this to six years upon seeing John of Gaunt's grieving face, while Mowbray is banished permanently. The king's decision can be seen as the first mistake in a series leading eventually to his overthrow and death, since it is an error which highlights many of his character flaws, displaying as it does indecisiveness (in terms of whether to allow the duel to go ahead), abruptness (Richard waits until the last possible moment to cancel the duel), and arbitrariness (there is no apparent reason why Bolingbroke should be allowed to return and Mowbray not). In addition, the decision fails to dispel the suspicions surrounding Richard's involvement in the death of the Duke of Gloucester - in fact, by handling the situation so high-handedly and offering no coherent explanation for his reasoning, Richard only manages to appear more guilty. Mowbray predicts that the king will sooner or later fall at the hands of Bolingbroke.

John of Gaunt dies and Richard II seizes all of his land and money. This angers the nobility, who accuse Richard of wasting England's money, of taking Gaunt's money (belonging by rights to his son, Bolingbroke) to fund war in Ireland, of taxing the commoners, and of fining the nobles for crimes committed by their ancestors. They then help Bolingbroke to return secretly to England, with a plan to overthrow Richard II. There remain, however, subjects who continue faithful to the king, among them Bushy, Bagot, Green and the Duke of Aumerle (son of the Duke of York), cousin of both Richard and Bolingbroke. When King Richard leaves England to attend to the war in Ireland, Bolingbroke seizes the opportunity to assemble an army and invades the north coast of England.