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In the seventeenth century, Sir Simon de Canterville (Charles Laughton) is forced by the Code of Chivalry to engage in a duel on behalf of his brother, but flees to the family castle when his opponent is substituted for by a giant (played by an uncredited Tor Johnson). His proud father, Lord Canterville (Reginald Owen), refuses to acknowledge that his son has disgraced the family name, even when shown in front of witnesses where Simon is cowering. The father has the only entrance to his son's hiding place bricked over as proof that Simon is not there, ignoring Simon's pleas for mercy. Lord Canterville then curses his doomed cowardly son to find no rest until "a kinsman shall perform an act of bravery" in his name.
The film then moves forward to World War II. US Army Rangers are billeted in the castle, owned now by a six-year-old Lady Jessica de Canterville (Margaret O'Brien). One of the men is Cuffy Williams (Robert Young). The Rangers encounter Sir Simon but rather than being terrorized, humiliate the ghost with a mock haunting. With Cuffy's help, Jessica overcomes her own terror of the ghost. Jessica discovers that Cuffy is a Canterville by a distinctive birthmark. Together, the two meet and learn the fate of their ghostly ancestor. One night, Simon takes Cuffy on a tour of the family portrait gallery, recounting the cowardly act of each descendant. Cuffy scoffs at Simon's misgivings and boasts that he is different.
However, when the "moment of crisis" comes, as his platoon conducts a commando raid in France, Cuffy seems to be a true Canterville and is paralyzed by fear in combat. Disgraced and leaving the Rangers, Cuffy is faced with an unexploded parachute mine threatening his platoon with destruction and is again overcome with fear. However, when Lady Jessica inadvertently activates the mine trying to inspire him, Cuffy hitches the bomb behind a jeep and steers it into a ravine. The courageous act finally frees Sir Simon from his centuries of bondage.