The main source of law is parliament-made. The process to make laws is similar in both the federal and state parliaments. Laws made by parliaments are called statutes, Acts or legislation. A draft Act is called a Bill. A Bill is debated by the parliamentarians and if it is passed by a majority in both Houses of Parliament it becomes an Act.

In addition to Acts of Parliament, there are laws covering administrative details or other matters not easily dealt with in an Act. Parliament can delegate to a public authority, a local council, a Minister controlling a government department, or a public servant the power to make regulations, rules, ordinances or local laws. These types of laws are known as delegated legislation.

The precise meaning of words and phrases in Acts and delegated legislation is sometimes difficult to understand. Courts are often involved in deciding the meaning of particular parts or words of an Act. The court's interpretation of sections and words in an Act becomes part of the law. For example, the law related to divorce is not wholly contained in the Family Law Act 1975 (Cth). It is found by looking at both the Act and the decisions judges have made in court cases, about the Act.

Victorian Acts apply to those living in Victoria and to the courts and judges within Victoria. Commonwealth Acts apply to the whole of Australia and to the courts and judges handling Commonwealth or federal law. The Constitution (see below) sets out which parliament has responsibility for different aspects of government.

Generally, judges cannot overrule or challenge an Act unless the Act is "unconstitutional". This means it was beyond the power of the Commonwealth or state parliament to make that law in the first place. The courts can then declare the Act or parts of it invalid and of no effect.

The High Court can also resolve disputes where Commonwealth and state laws clash. The famous Tasmanian dams dispute in 1983 was an example of this principle at work. The Tasmanian Government wanted to build a dam in a wilderness area. The Federal Government wanted to protect the wilderness area. The State Parliament passed a law permitting the dam to be built. The Federal Government passed a law protecting the wilderness from a dam. The clash of the two inconsistent laws was tested in the High Court. The High Court followed the accepted rule that where a valid state law and a valid federal law clash, the federal law will prevail. The dam was stopped.

If a government does not like a judge's decision and/or interpretation of an Act, the parliament can pass an Act specifically to overturn that decision. Parliament can also add rules to judge-made law. In that case, parliament-made law will assert all the rules for that area.

From time to time, parliament will repeal (do away with) or amend (change) an Act. Parliament is not restricted because of earlier Acts, and can change laws as it wishes.

A set of rules has been developed by judges to help them interpret Acts; for example, there is a rule of interpretation which says that Acts are to be given their ordinary meaning unless that would lead to some absurdity. When, for example, an Act says a Minister may do this or that, we know that the Minister has a discretion to do something. If the Act says the Minister shall do something, we know the Minister is bound to do something. These rules assist people using an Act as they give some certainty to the meaning of commonly used words.

Occasionally, the meaning of an Act is unclear and the court decision (if there is one) is not helpful in clarifying the meaning. Where this occurs, the law is difficult to state one way or the other.

Few Australian laws were made by parliaments prior to 1850. Judges decided each case as it came to court. They wrote down the reasons for their decisions and these are called judgments. The important judgments were published in books known as law reports.

Judges were (and still are) bound by a strong tradition to decide each similar case along the lines of earlier decisions made. If the facts of the earlier cases were not exactly the same, the judge could still compare the situations and apply a common principle or develop a new, reasonably similar principle for the new facts. This is known as the doctrine of precedent. The principles and rules contained in the collection of judgments and court procedures became known as the common law.

Some of the rules that direct the conduct of court cases and court-made law are as follows.

The doctrine of precedent means that the judges in lower courts must follow decisions of higher courts and a single judge of a court must follow a decision with more than one judge in that court.

The decisions of courts outside Australia are not binding on Australian courts, although they assist or guide Australian courts in making decisions on new facts or new legislation. If, for example, the case before the Australian court is unusual or difficult, the judges and lawyers will look to the decisions of overseas courts for guidance or comparison.

A court, when it makes a decision, will give reasons for its decision. Another case with similar but not identical facts can be decided differently. If this happens reasons will usually be given as to why this case should be treated differently. Each case is decided on its own facts.

The highest court in Australia is the High Court, which consists of seven judges and is based in Canberra. The Chief Justice of the High Court is Australia's most senior judge. The High Court need not follow its own earlier decisions, or precedents, and can make new law by deciding, with a majority of judges, to change the law. The High Court clearly did this with the landmark Mabo decision of 1992, when the judges decided to abandon what was then the established law on Aboriginal title to land (see: "Aboriginal law", below). For the first time, the High Court declared that the Australian legal system could recognise indigenous legal systems that existed before white settlement.

Parliament-made law overrules judge-made law if both apply to the same problem. But judge-made law still applies in many areas and the practice of following previous court decisions continues today. Not only do judges continue to develop the law in areas not covered by legislation, they also have an important creative role in interpreting legislation when there is a dispute about the meaning or application of a section of an Act. The decisions judges make in interpreting Acts become part of the common law, which other courts will refer to.

An important recent development in relation to the interpretation of law in Victoria is the adoption by Parliament of the Charter of Human Rights and Responsibilities Act 2006 (Vic) ("the Charter"). This parliament-made law seeks to ensure that certain human rights are taken into account when developing, interpreting and applying Victorian law and policy. The Charter came into force on 1 January 2007, although the obligation of public authorities to consider and act consistently with human rights and the courts to interpret and apply legislation in accordance with the Charter became effective on 1 January 2008.

The rights in the Charter come mainly from an international human rights document, the International Covenant on Civil and Political Rights. The rights included in the Charter are:

The Charter requires courts and tribunals, as far as possible, to interpret and apply legislation consistently with these human rights. If this is not possible, the Supreme Court can issue a Declaration of Inconsistent Interpretation. The government must then respond to this Declaration within six months.