The third chapter in the Karate Kid begins as the ‘Kobra Kai’ instructor Kreese walks into his now empty Karate school. He locks up & goes to his former Vietnam War comrade & fellow ‘Cobra Kai’ instructor Terry Silver to handover the keys of the premises. Silver is in the midst of his Karate workout, and, while surprised to see Kreese, he advises against giving up, and sends him on vacation while Terry will ‘handle’ Mr. Miyagi & Daniel. As Silver leaves Kreese at the airport, we see Mr. Miyagi & Daniel coming out of the Airport, returning from their summer in Okinawa.
Daniel & Mr. Miyagi reach their apartment building only to find that it has been closed for renovation. Mr. Miyagi loses his job. Daniel’s mother is in New Jersey taking care of his uncle. So they move all their things to Mr. Miyagi’s house. Daniel gives Mr. Miyagi the idea of opening a Bonsai store. So he goes to an estate agency to rent out a shop. Mr. Miyagi reluctantly agrees and they start their business together.
Silver, hires ‘Karate’s Bad Boy’ Mike Barnes to beat up Daniel & humiliate Mr. Miyagi in the upcoming annual ‘All Valley’ Karate Tournament in return for a share of business ownership. Soon a tournament enrollment application form comes to Daniel in the mail. Daniel asks Mr. Miyagi for his consent to enroll, but the old man refuses. Daniel goes to get some pottery planters from the shop opposite, and meets Jessica. They become good friends immediately.
When he comes back, Mr. Miyagi’s answer was still NO. Later that day, as the two were working out in the back garden, Silver arrives, bringing the news of Sensei Kreese’s demise from a broken heart and distress. Of course Silver was only lying, just to gain sympathy [but those two took him at his word]. That evening as Daniel was getting ready to go out with Jessica, Silver, was secretly snooping around Mr. Miyagi’s house, and finds out that Mr. Miyagi was also a decorated hero of WW2. As soon as Daniel & Mr. Miyagi came in, he crawled up the fireplace. Daniel told his mentor that he decided to forget about the tournament, and discards the application.
When they had gone, Silver goes back, getting the information he wanted. The next day, while Daniel & Jessica were having dinner at the Bonsai shop, Barnes comes with his goons to force Daniel to sign the application. He refuses so they start smashing up the shop. Mr. Miyagi arrives and beats them up. When the two come back from an evening out, Mr. Miyagi & Daniel find all the Bonsai trees stolen and an enrollment application kept there to sign.
While Daniel & Jessica are out jogging, Silver meets them and tells Daniel about a book of Karate sweep techniques. In the afternoon, as Daniel is working out, Barnes comes and pesters him. Silver appears and ‘pretends’ to beat up Barnes, thereby sending him away. He offers Daniel to come and train with him at the ‘Kobra Kai’ school. Daniel, thinking that Mr. Miyagi won’t train him, turns to take up Silver’s offer [never guessing Silver’s hidden agenda]. During these days, Daniel only talks business with Mr. Miyagi, and starts training with Silver. The old man notices the change in Daniel, and starts to get worried.
Daniel & Jessica go to the mountains in search of Mr. Miyagi’s original Japanese Bonsai, so that they can sell it and recover their losses. Barnes and his goons arrive there also, snatching the delicate tree from Daniel and snapping it in two and giving Daniel the application, which, this time he does sign. Daniel brings home the broken tree to Mr. Miyagi, who immediately gives it the necessary treatment. He tells Mr. Miyagi that he signed the application under pressure. The old man understands but still refuses to train him. Daniel, at that time didn't care because he was training with Silver.
Daily Daniel goes to the ‘Kobra Kai’ school and comes back with physical injuries, and daily his attitude with Mr. Miyagi worsens. In fact, Silver was subjecting Daniel to physical torture & brainwashing him of all his classical Okinawa Karate and drilling into him the concept of violent street fighting Karate. One night, Jessica & Daniel went to a club where, upon Silver’s payroll, a man insults Jessica, for which Daniel punched and broke his nose. Daniel immediately flees the scene. Feeling guilty for his action, Daniel goes to confront Silver at the training school. There he sees that a fully alive Kreese, Barnes & Silver are all working together to take revenge on him & Mr. Miyagi. They start picking on him, until, Mr. Miyagi arrives, who beats them up. Mr. Miyagi, now realizing, that this has become a matter of self-respect, agrees to train Daniel for the tournament.
Time passed, and Daniel’s training was well on course, so too was the recovery of the broken Bonsai tree. The day of the tournament came and the two first went to the woods to re-plant the Bonsai before heading for the stadium.
In the competition, Daniel & Barnes fought only in the final and throughout the 3 minute bout, [preplanned by Silver & Barnes so as to humiliate Daniel & Mr. Miyagi in front of the public], the score remained 0-0. During the one minute overtime of ‘Sudden Death’, Daniel wins the final point, thereby smashing all ‘Kobra Kai’ plans to smithereens.