Enagic Australia Pty Ltd v Direct Selling Australia Ltd

1. [1]

   The plaintiff, Enagic Australia Pty Ltd, was, until 31 March 2025, a member of the defendant, Direct Selling Australia Ltd (“DSA”). It first became a member of DSA in 2010.

2. [2]

   On 9 April 2025 DSA notified Enagic that it was “not renewing Enagic’s membership”.

3. [3]

   DSA’s decision was made by its Board, relying on cl 2.3(f) of DSA’s constitution (the “Constitution”). Clause 2.3(f) provides, relevantly, that a person is eligible to remain a member of DSA if it is “not associated” with persons who promote, encourage or incite non-compliance with the Constitution, DSA’s Code of Practice (the “Code”) or any policy, standard or condition the Board may determine (the “Board Policies”).

4. [4]

   The Board determined that Enagic was so “associated” with such persons and thus no longer eligible to remain a member.

5. [5]

   The question is whether, on the proper construction of the Constitution, the Board had the power to make this determination.

6. [6]

   Thus, Enagic seeks a declaration that, on the proper construction of the Constitution the Board’s decision was of “no effect”.

7. [7]

   I am not asked to determine whether, as a matter of fact, Enagic had the posited “association”. In effect, I am asked to assume this for the purpose of the proceedings.

Enagic and DSA

1. [8]

   Enagic manufactures and sells water purification and ionisation devices. Enagic operates using a multilevel marketing model under which independent distributors sell Enagic’s products.

2. [9]

   Enagic’s business model is one of direct selling. Direct selling is a form of retailing where products and services are marketed to customers directly through independent sales consultants, known as distributors. The distributors contract with various direct selling companies. Enagic is such a direct selling company. It currently has some 9,400 distributors.

3. [10]

   DSA is a trade association and representative body for direct selling companies in Australia. It is a member of the World Federation of Direct Selling Associations.

4. [11]

   DSA is a company limited by guarantee. Its operation is regulated by its Constitution. The Constitution operates as a contract between DSA and its members. [1]

5. [12]

   DSA does not hold any government role and membership of DSA is not required by any legislation.

6. [13]

   The purposes of DSA are outlined in cl 1.1 of its Constitution as follows:

7. [14]

   Ms Joanne Badman, the Compliance Officer of Enagic, described the benefits to Enagic of being a member of DSA as follows:

8. [15]

   That appears to be reflected by the following publication of DSA:

The renewal process

1. [16]

   Membership in DSA is for the calendar year ending 31 March (the “Membership Year”).

2. [17]

   Until this year, the process whereby Enagic renewed its membership of DSA was that in or around February each year, DSA sent Enagic an email requesting that Enagic complete an “Annual Membership Survey”. The survey collected information of a financial nature, including information about Enagic’s income and independent sales people.

3. [18]

   DSA used the information it collected in the Annual Membership Survey to determine Enagic’s subscription fees for the next Membership Year.

4. [19]

   The annual membership fee for the year ended 31 March 2025 was $19,199. The annual fees for the preceding years were for a similar amount.

The events leading to the purported non-renewal of Enagic’s membership of DSA

1. [20]

   In June 2024, the Australian Broadcasting Corporation published an article in relation to Enagic. The article was referred to in an email that DSA sent Enagic on 11 April 2025 notifying it of DSA’s decision not to renew Enagic’s membership. I return to this below. [2]

2. [21]

   On 20 December 2024, the Board of DSA passed a “circulating resolution” that DSA “does not offer renewal of membership for the 2025 to 2026 year to Enagic”.

3. [22]

   DSA did not give notice to Enagic that it was contemplating making this decision, and did not notify Enagic of the decision until 9 April 2025. [3]

4. [23]

   Enagic remained listed on DSA’s website as a member of DSA until at least March 2025.

5. [24]

   On 8 April 2025, one of Enagic’s distributors sent a text message to a director of Enagic:

6. [25]

   That day, Ms Badman checked the DSA website and saw that Enagic was no longer listed as a member on DSA’s website.

7. [26]

   Later that day, Ms Badman telephoned an officer of DSA inquiring about Enagic’s membership renewal in the 2025 to 2026 year.

8. [27]

   The following day, 9 April 2025, DSA’s Chief Executive Office, Mr Geoff Mulham telephoned Ms Badman. They had this conversation:

9. [28]

   On 11 April 2025, Mr Mulham sent that email to Ms Badman. Mr Mulham referred to his conversation with Ms Badman on 9 April 2025 and continued:

10. [29]

    Mr Mulham then referred to the June 2024 ABC investigation and continued:

11. [30]

    Mr Mulham concluded:

12. [31]

    Solicitors’ correspondence ensued.

13. [32]

    On 7 May 2025, DSA’s solicitors disclosed to Enagic, for the first time, the fact of the 20 December 2024 “circulating resolution”.

Did Enagic “simply fail to renew its membership”?

1. [33]

   DSA’s primary position was that Enagic had failed to renew its membership beyond 31 March 2025, and that this was the end of the matter.

2. [34]

   Thus, I had this exchange with Ms King:

3. [35]

   Clause 3.1 provides, relevantly:

4. [36]

   Clause 3.3 provides that a person or organisation “automatically ceases to be a Member” if, relevantly, the person or organisation “does not renew membership by the due date”.

5. [37]

   However, my attention was not drawn to any provision in the Constitution that regulates the process by which a member of DSA must renew their membership.

6. [38]

   There may be a provision in the Regulations dealing with this but, if that is so, my attention was not drawn to it.

7. [39]

   I have set out Ms Badman’s account of the practice that has been followed concerning renewal of Enagic’s membership. It may be that the reason DSA did not, this year, send Enagic the Annual Membership Survey of which Ms Badman spoke was because the Board had already resolved that Enagic’s membership not be renewed. Why Enagic did not follow the matter up was not explored before me. Determination of the consequences of these matters would require a wider ranging enquiry than was conducted before me and not a matter about which I can form any opinion.

8. [40]

   In those circumstances, it is, in my opinion, necessary for me to consider the “constitutional question”.

Principles concerning the construction of the company’s constitution

1. [41]

   Company constitutions are generally interpreted in accordance with the principles that apply to commercial contracts, although regard must be had to the special characteristics of a company constitution. [4]

2. [42]

   Further:

3. [43]

   A court, in interpreting a provision of a commercial contract, has regard to its words, its context, and the purpose of the document as a whole. The leading modern statement on the importance of context and purpose is found in the reasons of French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd: [6]

4. [44]

   The question is what a reasonable business person in the position of the parties would have understood the relevant terms to mean; an objective task involving identification of the imputed intention of the parties by reference to the contractual text, construed in the light of its context and purpose. [10]

5. [45]

   Further, as has also been correctly stated: [11]

6. [46]

   Neither party suggested that regard should be had to surrounding circumstances when construing the Constitution.

The relevant provisions of the Constitution

1. [47]

   As I have said, DSA’s position is that the Board was empowered by cl 2.3(f) of the Constitution to decide not to renew Enagic’s membership of DSA.

2. [48]

   Before turning to cl 2.3(f), I turn to cl 2.2 of the Constitution that provides:

3. [49]

   The second sentence of cl 2.2 refers to the “eligibility and rights” of members as set out in the following table. In that context “eligibility” must refer to the general nature of entities that are eligible to become members, as set out in the table; that is, either a Direct Selling Organisation, a Supply Member, or a Life Member. I do not read this clause as dealing with the eligibility of particular members. The meaning of the second sentence of cl 2.2 is not obvious save that the subject of the Board’s “determination” there referred to is as to the general nature of the “rights, benefits, privileges, entitlements, obligations, liabilities, eligibility and status” of members, not the “rights, benefits, privileges, entitlements, obligations, liabilities, eligibility and status” of particular members.

4. [50]

   The question of the eligibility requirements for particular members is dealt with in cl 2.3:

5. [51]

   As can be seen, in the chapeau to cl 2.3, it is stated that what follows is “in addition to the requirements set out in clause 2.2”; that is the “eligibility” requirements summarised in the table to cl 2.2.

6. [52]

   Clause 2.2 is directed to the eligibility of particular “persons” falling within one or other of those general categories of eligibility: being a Direct Selling Organisation, a Supply Member, or a Life Member.

7. [53]

   Three of the circumstances in which “a person is eligible to become and remain” a member depend upon the Board forming a particular opinion: see cll 2.3(a), (b) and (g). It is thus a “requirement” for eligibility that the Board form that opinion.

8. [54]

   The other four requirements for eligibility require that the person, as a matter of fact, and not merely in the Board’s opinion:

9. [55]

   Clause 2.3 is silent as to how a member is to be dealt with if a circumstance arises that renders them no longer eligible to be a member.

10. [56]

    As I have said, cl 3.1 of the Constitution provides that the Board has an “absolute discretion” as to who is to be admitted as a member. [12]

11. [57]

    Although Mr Mulham referred to this clause in his 11 April 2025 email, [13] I do not see it as being dispositive here as it deals only with the admission of a person as a member; not with whether a member is eligible to become and remain a member.

12. [58]

    Clause 3.3, to which I have referred, [14] also provides that a person “automatically ceases to be a Member” if the person “ceases to be eligible to be a Member”. [15]

13. [59]

    A person ceases to be eligible to be a member once any one of the matters in cl 2.3 is engaged.

14. [60]

    But what is to be done in that event?

15. [61]

    Clause 3.4 is critical and provides:

16. [62]

    The categories of Sanctionable Conduct specified in cl 3.4(a) include three that correspond, exactly, to the requirements for eligibility specified in cl 2.3.

17. [63]

    Thus:

    1. (1)

       cl 3.4(a)(2), which prescribes conduct that is “not that of a Fit and Proper person” as being Sanctionable Conduct, corresponds with cl 2.3(a);

    2. (2)

       cl 3.4(a)(3), which prescribes non-compliance with Board Policies as being Sanctionable Conduct, corresponds with cl 2.3(e); and

    3. (3)

       cl 3.4(a)(6), which prescribes a refusal or neglect to comply with the Constitution or the Code as Sanctionable Conduct, corresponds with cl 2.3(c)(d), and also, less directly, with cl 2.3(b) and (g).

18. [64]

    Clause 3.4 does not, in terms, prescribe the conduct referred to in cl 2.3(f), being associated with a person who promotes, encourages, or incites non-compliance with the Constitution, the Code, or Board Policies as Sanctionable Conduct. But cl 3.4(a)(3) does prescribe actual non-compliance with the Constitution, the Code and Board Policies as Sanctionable Conduct.

19. [65]

    Further, the conduct referred to in cl 2.3(f) would inevitably constitute Sanctionable Conduct: that is, conduct prejudicial to DSA, [16] conduct not that of a Fit and Proper person, [17] and conduct unbecoming of members. [18]

20. [66]

    Clause 3.4 then sets out an elaborate procedure to be followed in any case of alleged Sanctionable Conduct. I attach a copy of cll 3.4(b)-(k). Clauses 3.4(b) to (k) (83.1 KB, pdf)

21. [67]

    In summary:

    1. (1)

       first, the Chief Executive Office of DSA “may” investigate a complaint or concern regarding a member on his or own motion or on receipt of a complaint from a consumer; [19]

    2. (2)

       if the Chief Executive Office forms the view that the Member may have engaged in Sanctionable Conduct, the Chief Executive Officer “must” prepare a “Disciplinary Notice” or issue an informal letter to the Member outlining issues of concern and “must” recommend whether the Board should proceed to take further steps; [20]

    3. (3)

       the Board then “must” consider the Chief Executive Officer’s recommendation and either issue a Disciplinary Notice, issue an informal letter, request further investigations, or take no further action; [21]

    4. (4)

       if the Board issues a Disciplinary Notice it “must” convene a “disciplinary tribunal”; [22]

    5. (5)

       if that occurs, the disciplinary tribunal “must” convene expeditiously, make such order as it considers appropriate and give written reasons for its decision; [23]

    6. (6)

       in doing so the tribunal “must” afford the Member “procedural fairness and the right to be legally represented”, and allow the member a reasonable opportunity to make submissions; [24] and

    7. (7)

       the tribunal can impose a sanction including a caution, a fine, suspension of membership, or termination of the Member’s membership of the company. [25]

22. [68]

    The Constitution thus specifies a detailed process for dealing with a Member accused of Sanctionable Conduct. That process includes a right to be heard, a right to be represented, a right to have written reasons and an entitlement generally to procedural fairness.

23. [69]

    Nonetheless, Ms King submitted that there were “two alternative pathways here” and that if the Board concluded in relation to a particular member that cl 2.3(f) was engaged it could, of its own motion, without notice to the member, and without giving the member a chance to be heard, determine that membership not be renewed; and thus bypass the elaborate procedures set forth in cl 3.4.

24. [70]

    I had this exchange with Ms King:

25. [71]

    I do not accept that, on the proper construction of the Constitution, this is its effect.

26. [72]

    Ms King did not point to any words in the Constitution that compelled acceptance of her posited construction.

27. [73]

    And I think that reasonable persons in the position of the original subscribers to the Constitution would not have understood the Constitution to have this effect.

28. [74]

    The Constitution contains specific and detailed provisions dealing with what is to be done in relation to a member who is said to have engaged in conduct that calls into question their continued eligibility as a member of DSA.

29. [75]

    The general rule is that “where a contract contains general provisions and specific provisions, the specific provisions will be given greater weight than the general provisions where the facts to which the contract is to be applied fall within the scope of the specific provisions”. [26]

30. [76]

    Here, there are general provisions in cl 2.3 specifying the eligibility requirements of members, but which make no provision for the consequences of ineligibility. On the other hand, there are specific provisions in cl 3.4 spelling out those consequences. Those specific provisions must prevail.

31. [77]

    The matter can be tested this way.

32. [78]

    Had the Board concluded that Enagic was not a “Fit and Proper person”, and thus by reason of cl 2.3(a) no longer eligible to remain a member of DSA, cl 3.4 constitutes a specific provision obviously intended to set out how such matter was to be dealt with. [27] It would be extraordinary if the Board could simply ignore that specific provision and arrogate to itself the power summarily to determine the mater.

33. [79]

    Similarly, had the Board concluded that Enagic had failed to comply with the Constitution, the Code or Board Policies, and thus by reason of cll 2.3(c)-(e) no longer eligible to remain a member of DSA, cl 3.4 contains specific provisions addressing that very question. [28]

34. [80]

    I cannot see how the position could be different where, as here, Enagic is not accused of actually failing to comply with the Constitution, the Code or a Board Policy, but is, allegedly, associating with persons who promote, encourage, or incite non-compliance with the Constitution, Code, and Board Policies; especially where such conduct would inevitably itself be Sanctionable Conduct of one kind or another.

35. [81]

    A fair reading of the Constitution shows that cll 2.3 and 3.4 constitute two sides of the same coin. Clause 2.3 deals with the requirements for eligibility and cl 3.4 deals with the consequences of ceasing to or failing to satisfy those requirements.

36. [82]

    This reading of the Constitution has the effect that if the Board forms the opinion that a member is no longer eligible to remain a member, that member will be given notice of the matters of concern, have a right to be heard, be afforded procedural fairness and be given reasons for any decision adversely affecting its position.

37. [83]

    The Board was not itself entitled to determine these matters.

Conclusion

1. [84]

   I propose to make a declaration to the effect that, on the proper construction of the Constitution, the board was not itself entitled to determine that Enagic not be offered renewal of its membership of DSA.

2. [85]

   I will invite submissions as to the precise form of the declaration.

3. [86]

   Enagic also seeks orders that DSA:

   1. (1)

      notify it of all fees payable by it, including its annual subscription for the membership year 1 April 2025 to 31 March 2026;

   2. (2)

      advise it how payment for its annual subscription is to be paid for that membership year; and

   3. (3)

      process the renewal of its membership in accordance with the Constitution.

4. [87]

   I am not inclined to make these orders but will invite further submissions on the topic.