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SJC-12112

ERIC N. BALLES vs. BABCOCK POWER INC.

Middlesex. November 8, 2016. - March 6, 2017.

Present: Gants, C.J., Botsford, Lenk, Hines, Gaziano, Lowy, & 

Budd, JJ.

Executive. Employment, Termination. Corporation, Stockholder, 

Close corporation, Liability of officers. Contract, 

Employment, Performance and breach. Fiduciary.

Civil action commenced in the Superior Court Department on 

December 21, 2010.

The case was heard by Douglas H. Wilkins, J.

The Supreme Judicial Court granted an application for 

direct appellate review.

Mark C. Fleming (Jonathan A. Cox also present) for the 

defendant.

Thomas J. Carey, Jr. (Jody L. Newman also present) for the 

plaintiff.

Ben Robbins & Martin J. Newhouse, for New England Legal 

Foundation, amicus curiae, submitted a brief.

LENK, J. The dispute before us chiefly concerns the 

meaning and application of the stockholders' agreement between a 
2

company, Babcock Power Inc. (Babcock or company), and its former 

executive, Eric N. Balles. To a lesser extent, it also concerns 

the separate employment agreement between the two.

Babcock terminated Balles's employment when it discovered

that he was engaged in an ongoing extramarital affair with a 

young female subordinate. Babcock's board of directors (board)

subsequently concluded that Balles had been terminated "for 

cause" under the terms of his stockholders' agreement with the 

company, thereby allowing the board to repurchase his stock at a 

minimal price. The board withheld subsequent dividends, 

amounting to approximately $900,000 in total, and refused to pay 

Balles any severance.

Years of litigation followed, with Balles seeking 

declaratory relief to the effect that the stock be returned to 

him, along with the withheld dividends. Babcock responded with 

counterclaims on various grounds. Following a bifurcated trial, 

a Superior Court jury rejected Babcock's counterclaims, and 

although Balles prevailed at a jury-waived trial on his claim 

for declaratory relief, a portion of his prior salary was 

subjected to equitable forfeiture and he was unsuccessful in his 

bid to receive severance pay. Babcock appealed from the 
3

judgment at the jury-waived trial, and we allowed its 

application for direct appellate review. We affirm.1

1. Background. We recite the facts found by the trial 

judge, which the parties acknowledged at oral argument they do 

not challenge. We have supplemented those findings by reference 

to facts in the record that the parties do not dispute.

a. Stockholders' agreement and employment agreement. When 

his employment at Babcock began in 2002,

2 Balles entered into two 

agreements: a stockholders' agreement and an employment 

agreement.

3 Under the terms of the stockholders' agreement, 

Balles, one of seventeen "management investors" in Babcock,4

received 100,000 shares of common stock in the company at a 

price of $0.001 per share.

Section 5 of the stockholders' agreement sets forth the

rights of management investors in the event of their 

 

1 We acknowledge the amicus brief submitted by New England 

Legal Foundation in support of the defendant.

2 Balles joined the conglomerate that would become Babcock 

Power Inc. (Babcock or company) in 2001, when he became the 

senior vice-president of technology development for Babcock 

Borsig Power, Inc. (Borsig). In 2002, Borsig combined with 

several other affiliated companies to form a new entity, 

Babcock.

3 At all times relevant to this dispute, prior to his 

termination, Balles served as an executive of various 

subsidiaries of Babcock.

4 Balles entered into the stockholders' agreement partially 

in consideration for relinquishing his rights in Borsig.
4

termination. Section 5(d) states that, if a management 

investor's employment is terminated without cause, the

stockholders' agreement continues to apply to his or her stock. 

By contrast, section 5(e) provides that if a management 

investor's employment is terminated "for cause," as defined in 

the stockholders' agreement, Babcock's board of directors must 

repurchase his or her stock at the nominal price of $0.001 per 

share.

"Cause," in turn, is defined under section 1 of the 

stockholder's agreement as follows:

"(a) fraud, embezzlement or gross insubordination on the 

part of the Management Investor; (b) the Management 

Investor's conviction of or plea of nolo contendere to any 

felony; (c) the Management Investor's willful and material 

breach of or willful failure or refusal to perform and 

discharge, his duties, responsibilities or obligations to 

the Company (other than by reason of disability or death) 

that is not corrected within thirty (30) days following 

written notice thereof to the Management Investor by the 

Company, such notice to state with specificity the nature 

of the breach, failure or refusal; provided, that if such 

breach, failure or refusal cannot reasonably be corrected 

within thirty (30) days of written notice thereof, such 

thirty (30) day period shall be extended for so long as may 

be reasonably necessary to correct the same; or (d) any act 

of willful misconduct by the Management Investor which (i) 

is intended to result in substantial personal enrichment of 

the Management Investor at the expense of the Company or 

any of its subsidiaries or affiliates or (ii) is intended 

to and does have a material adverse impact on the business 

or reputation of the Company or any of its subsidiaries or 

affiliates. For purposes of this Agreement, a 

determination of 'Cause' may only be made by the Board of 

Directors of the Company."
5

The stockholders' agreement also provides for a jury-waived 

trial to adjudicate any claims arising under it, stating in 

relevant part that "each party acknowledges and agrees that any 

controversy which may arise under [the stockholders' agreement]

is likely to involve complicated and difficult issues," and that 

the parties "waive[] any right such party may have to a trial by 

jury in respect of any litigation directly or indirectly arising 

out of or relating to the [stockholders' agreement]."

The employment agreement between Balles and Babcock 

provided that he would serve as an employee "at will" and could 

be terminated at any time for any reason. The employment

agreement also stated that, in the event of Balles's 

termination, he would be entitled to severance pay unless he was 

terminated for cause, "as defined in [the] [s]tockholders' 

[a]greement."

b. Relationship with female subordinate. The female 

subordinate began working at Babcock as an intern when she was 

still an undergraduate student. She eventually obtained a fulltime position at the company as an "Engineering Management 

Assistant/Engineering Coordinator." After receiving two raises

while serving in this role, she eventually was promoted to the 

position of "Operations Associate/Engineering." Balles was her 

supervisor at all relevant times.
6

In the summer of 2008, Balles began an intimate

extramarital relationship with the female subordinate, which 

continued through his termination in 2010. The pair pursued 

their relationship on business trips funded by Babcock, and

exchanged sexually explicit text messages on their personal 

cellular telephones. Balles uploaded, downloaded, and saved 

photographs of the female subordinate, some depicting sexual 

content, on his Babcock-issued laptop computer.

5 To conceal his 

relationship with the female subordinate from Babcock, Balles 

falsified the details of at least one travel reimbursement 

request, but did not intentionally claim any fiscal

reimbursement from Babcock to which he was not entitled under 

company policy.6

On August 30, 2010, Michael LeClair, the president and 

chief executive officer of Babcock, learned of the relationship 

between Balles and the female subordinate. Soon thereafter, Jim 

Dougherty, president and chief executive officer of a subsidiary 

of Babcock, hand-delivered a memorandum to Balles stating that 

 

5 Balles gave several conflicting explanations as to how the 

photographs of the female subordinate ended up on his Babcockissued laptop computer, none of which was credited by the trial 

judge.

6 The trial judge found that Balles did not intentionally 

deprive Babcock of any funds during his relationship with the 

female subordinate. He did find, however, that Balles 

apparently inadvertently requested $316.43 in reimbursements to 

which he was not entitled.
7

his employment was suspended "pending an investigation into 

allegations of misconduct and improper workplace behavior 

relating to [his] relationship with a female subordinate 

employee." Babcock's investigation included an in-depth review 

of Balles's documents, text messages, and electronic mail 

messages, all of which were stored on his company-issued 

computer. The investigation disclosed more than one hundred 

photographs and thousands of text messages between Balles and 

the female subordinate. Several of the messages described

executives, as well as Balles's "negative feelings about working 

for [Babcock] and about his superiors." LeClair came to the 

conclusion that "Balles failed to perform his job from the 

moment" that he began his affair with the female subordinate.

During the investigation, Balles repeatedly requested a 

face-to-face meeting with the board, which Babcock declined to 

provide. He received a letter on September 15, 2010, informing 

him that his employment had been terminated effective September 

1, 2010, and that the board would be meeting shortly to 

determine whether his conduct met the definition of "[c]ause" 

under the stockholders' agreement. Babcock's attorney sent 

notice separately that it would not be necessary for Balles to 

provide information relating to the allegations of misconduct 
8

against him. The parties engaged in settlement negotiations but 

were unable to come to an agreement.7

At the subsequent board meeting to determine whether 

Balles's conduct constituted "cause" within the meaning of the 

stockholders' agreement, LeClair summarized the investigation 

and recommended that the board terminate Balles "for cause"

pursuant to clauses (a), (c), and (d) of the definition of 

"[c]ause" in section 1 of the stockholders' agreement. The 

board, after discussion, unanimously agreed, as noted in its

minutes, that Balles's conduct constituted "cause" under the 

stockholders' agreement. The minutes reflected the board's 

determination that there was "overwhelming and irrefutable 

evidence that . . . Balles engaged in serious misconduct during 

his employment and [that] such misconduct was a breach of 

fiduciary duty to the [c]ompany, including a breach of his duty 

of loyalty." Because the board terminated Balles for cause, it 

went on to "repurchase" all of Balles's shares pursuant to 

section 5(e) of the stockholders' agreement, "amounting to 

100,000 shares of capital stock of [Babcock] for a repurchase 

price of $0.001 per share."

c. Prior proceedings. Shortly after the board voted to 

terminate him "for cause," Balles commenced this action against 

 

7 Balles's settlement offer included a forfeiture of 

$500,000 in dividends and a limited noncompete agreement. The 

board summarily rejected this offer.
9

Babcock in the Superior Court. He sought a declaratory judgment 

invalidating the board's repurchase of his shares under the 

stockholders' agreement and alleged that the board had committed 

a breach of the agreement by denying him subsequent dividend 

payments. He also asserted that the company had committed a 

breach of his employment agreement by declining to pay him 

severance upon his termination. The company denied the 

allegations and asserted seven counterclaims.8 The proceedings 

in the Superior Court were bifurcated into a jury trial to 

adjudicate the majority of Babcock's counterclaims, and a jurywaived trial to resolve Balles's declaratory judgment and 

contract claims, along with Babcock's counterclaim asserting a

breach of fiduciary duty and the duties of loyalty and good 

faith.

9

The jury found for Balles on Babcock's counterclaims. The

trial judge, moreover, ruled in favor of Balles on the

declaratory judgment and breach of contract claims, concluding

 

8 The counterclaims included "breach of fiduciary duty and 

the duties of loyalty and good faith," which the company alleged 

arose from Balles's occupation of "a position of trust and 

confidence at [Babcock]"; waste of corporate assets; fraud; 

misrepresentation; nondisclosure; conversion; and breach of the 

implied covenant of good faith and fair dealing.

9 The trial judge referred to this claim as the "equitable 

forfeiture claim," presumably because Babcock requested the 

equitable forfeiture of Balles's salary during the period of his 

affair with the female subordinate on the basis of his alleged 

breach.
10

that Balles "was not fired 'for cause' as defined in the 

[s]tockholders' [a]greement" and that he was therefore "entitled 

to the return of his stock and payment of all dividends and 

other benefits provided by Babcock . . . as if he had own[ed] 

the stock continuously." The judge found in favor of Babcock on

its remaining counterclaim, concluding that Balles had committed 

a breach of his fiduciary duty of loyalty to the company, owed 

pursuant to his status as an employee. On this basis, the judge 

assessed Balles $412,000 in equitable forfeiture of his past 

salary. The judge also rejected Balles's claim for severance 

pay under the employment agreement, on the ground that Balles

had committed a material breach of the agreement through his 

disloyal actions.

Babcock appealed from the judgment, raising issues arising

only from the jury-waived trial, and we allowed its application 

for direct appellate review.10 

2. Discussion. Babcock advances three arguments on 

appeal. First, it contends that the trial judge should have 

accorded deference to the board's decision and reviewed it only 

to ascertain whether it was arbitrary, capricious, or made in 

 

10 Balles did not appeal from the denial of his claim for 

severance under the employment agreement, or from the allowance 

of Babcock's breach of fiduciary duty claim resulting in the 

equitable forfeiture of his salary.
11

bad faith.

11 Second, it argues that the judge erred in 

determining that Balles's conduct did not constitute "cause" 

under clauses (a) and (c) of the definition of that term in 

section 1 of the stockholders' agreement. Third, it maintains

that Balles committed a material breach of the stockholders' 

agreement and therefore cannot recover under it. We address 

each argument in turn.

a. Appropriate standard of review. Babcock argues that 

the trial judge improperly reviewed on a de novo basis the

board's determinations of "cause." The company relies in this 

regard on the last sentence of the "[c]ause" definition in

section 1 of the stockholders' agreement, which provides that 

"[f]or purposes of this [a]greement, a determination of 

'[c]ause' may only be made by the [board]." Babcock contends 

that this language demonstrates the parties' intent that the 

board's determinations under the "cause" provision receive 

deference upon any judicial review. We agree with the trial 

judge that the language of the stockholders' agreement does not 

support Babcock's suggested interpretation.

 

11 In order to facilitate appellate review, the trial judge 

also applied the deferential standard of review to which Babcock 

argues it is entitled to the board's determination, concluding 

that the board's decision was "arbitrary and capricious."
12

We review a court's "interpretation of the meaning of a 

term in a contract," a question of law, de novo.12 EventMonitor, 

Inc. v. Leness, 473 Mass. 540, 549 (2016). In so doing, we are 

mindful that when the language of a contract is clear, it alone 

determines the contract's meaning, but that a court may consider 

extrinsic evidence if the language is ambiguous. Id. The 

determination of ambiguity in a contract is also a question of 

law. Eigerman v. Putnam Invs., Inc., 450 Mass. 281, 287 (2007). 

Contractual language is ambiguous when it "can support a 

reasonable difference of opinion as to the meaning of the words 

employed and the obligations undertaken" (citation omitted). 

Bank v. Thermo Elemental Inc., 451 Mass. 638, 648 (2008). When 

contract language is unambiguous, it must be construed according 

to its plain meaning. General Convention of the New Jerusalem 

in the U.S. of Am., Inc. v. MacKenzie, 449 Mass. 832, 835 

(2007).

To determine whether the language at issue is ambiguous, we 

look both to the contested language and to the text of the 

contract as a whole. Assuming without deciding that parties to 

a private agreement may contract for a specific standard of 

 

12 The interpretation of a contract constitutes "a question 

of law for the court" (citation omitted). See Freelander v. G. 

& K. Realty Corp., 357 Mass. 512, 516. Accordingly, a court 

generally will accord no deference to a party's interpretation 

of a contract but, rather, will focus on the language of the 

instrument to effectuate its terms. See id.
13

judicial review in this situation,13 we conclude that the 

language at issue is not ambiguous and that it does not provide 

for a deferential standard of judicial review.

On its face, the contract language that Babcock highlights 

speaks to which persons in the company are to determine "cause" 

for purposes of the stockholders' agreement. Standing alone, 

the sentence is silent as to an appropriate standard of judicial 

review for disputes relating to that determination. The 

language does not, by itself, contain an ambiguity that could 

support Babcock's suggested interpretation. The language also 

does not convey any ambiguity when read in conjunction with the 

remainder of clause (c) of the definition of "[c]ause" or the 

stockholders' agreement as a whole. The only provision dealing 

with a somewhat related matter is section 9(e)(iii), which 

provides that "any controversy which may arise under [the

stockholders' agreement] is likely to involve complicated and 

difficult issues, and therefore each . . . party . . . 

unconditionally waives any right such party may have to a trial 

 

13 Parties to a private agreement have been permitted to 

contract for a more deferential standard of review in certain 

instances, see, e.g., Acmat Corp. v. Daniel O'Connell's Sons, 

Inc., 17 Mass App. Ct. 44, 49 (1983) (contract provision 

granting architect power to decide all questions of 

interpretation of contract valid unless decision arbitrary or 

capricious), but not in others. See, e.g., Patton v. Babson 

Statistical Org., 259 Mass. 424, 428 (1927) ("It would be a 

travesty upon all ideas of judicial propriety or of judicial 

work for a man to be an arbitrator to settle the amount of his 

own liability" [citation omitted]).
14

by jury in respect of any litigation directly or indirectly 

arising [out] of or relating to [the stockholders' agreement]

. . . ." If anything, this recognition of the innate complexity 

of disputes arising under the contract and of the need for 

resolution by judges rather than juries is consistent with the 

application by judges of the usual de novo standard of review.14

Concluding, as we do, that the contractual language on 

which Babcock relies does not provide for judicial deference to 

the board's determination of "cause," de novo review by the 

trial judge thus was appropriate.

15

 

14 The result is the same if we assume, as the parties 

apparently do, that the language in question is ambiguous and 

turn to extrinsic evidence to discern the term's meaning. 

Because contracting parties' intent is an issue of fact, we 

defer to the trial judge's findings and review only for clear 

error. See Seaco Ins. Co. v. Barbosa, 435 Mass. 772, 779 

(2002). The trial judge concluded that the drafters "intended 

to protect the property rights of [management investors] through 

the specific language they chose, as finally construed and 

applied by a judge or judges." This determination is supported 

by the uncontroverted testimony of Dale Miller, a corporate 

lawyer who negotiated the stockholders' agreement. He testified 

that if the board terminated a management investor "for cause" 

without a "very clear" case, it "could have an adverse 

unintended consequence of having other founder 

shareholders . . . walk out the door," thus depriving the 

company of its "primary asset[s]."

15 Babcock's reliance on Noonan v. Staples, Inc., 556 F.3d 

20 (1st Cir. 2009), does not persuade us to the contrary. 

Noonan addressed a stock-option agreement providing that 

"[c]ause" would be "determined by [the company], which 

determination shall be conclusive." Id. at 24. The United 

States Court of Appeals for the First Circuit resolved that, 

given such language, judicial review of the company's 

determination would appropriately be limited to whether it "was 
15

b. Board's decision to terminate Balles for cause under 

stockholders' agreement. Babcock argues that the trial judge 

erred in determining that Balles's conduct did not meet clauses 

(a) and (c) of the definition of "[c]ause" in section 1 of the 

stockholders' agreement.

i. Clause (a). Babcock argues that Balles's conduct 

constituted "fraud" and "gross insubordination" under clause (a)

for three reasons: (i) his intentional submission of false 

expense reports for the purpose of concealing his affair with 

the female subordinate was fraudulent; (ii) his outspoken 

support for the female subordinate constituted fraud because she 

lacked fitness for employment; (iii) his over-all conduct during 

his relationship with the female subordinate constituted gross 

insubordination. We discern no error in the judge's 

determination that Balles's conduct did not constitute fraud or 

gross insubordination.

A. Fraud. The elements of fraud consist of "[1] a false 

representation [2] of a matter of material fact [3] with 

knowledge of its falsity [4] for the purpose of inducing 

 

arbitrary, capricious, or made in bad faith." Id. at 33. 

Babcock attempts to liken the language at issue to that in 

Noonan and urges that it similarly represents the parties' 

intent to provide the board with deferential review. The Noonan

contract, however, provided that the company's judgment "shall 

be conclusive" (emphasis added). Id. at 24. The language here, 

in contrast, merely provides that only the board is authorized 

to find cause in the first instance.
16

[action] thereon, and [5] that the plaintiff relied upon the 

representation as true and acted upon it to his [or her] 

damage." Danca v. Taunton Sav. Bank, 385 Mass. 1, 8 (1982), 

quoting Barrett Assocs. v. Aronson, 346 Mass. 150, 152 (1963).16

I. False reimbursement requests. The trial judge found 

that Balles's false reimbursement requests had not resulted in 

damage to Babcock, and that Balles lacked fraudulent intent, 

both necessary elements of fraud. Because Babcock has failed to 

show that the judge's findings, amply supported by the evidence, 

were clearly erroneous, it cannot establish that Balles's 

submission of false reimbursement requests gave rise to fraud 

that would constitute cause under clause (a) of the definition 

of "[c]ause" in the stockholders' agreement.

II. Advocacy for the female subordinate. Babcock 

similarly maintains, again without merit, that in view of the 

female subordinate's inadequate qualifications and poor job 

performance, it was fraudulent conduct on Balles's part to 

advocate -- as her supervisor and without disclosing their 

personal ties -- on her behalf professionally. The judge, 

however, determined that "[t]he jury, the court, or both, have 

rejected the factual claim that Balles was engaged in any ruse 

when he made decisions about [the female subordinate's]

 

16 Both parties accept that, as the trial judge determined, 

the definition of "fraud" under the stockholders' agreement 

mirrors the concept of fraud in our common law.
17

employment, [and] her salary and benefits," and that "[a]ll of 

those decisions had a sound business justification." He found 

in this regard that given "the actual work [the female 

subordinate] did, in combination with her obvious verbal and 

managerial skills, intelligence, maturity and motivation, . . . 

[the female subordinate] fully earned her salary, benefits, and 

tuition reimbursement during the period she was employed at 

[Babcock]."

To demonstrate that the female subordinate's qualifications 

and performance were inadequate, the company points to a 

statement from a coworker suggesting that she had received 

preferential treatment and a statement from a manager that she

lacked an engineering degree. These two statements, however, do 

not suffice to establish that the trial judge's findings of fact

to the contrary, supported by other evidence, were clearly 

erroneous. See Weiler v. PortfolioScope, Inc., 469 Mass. 75, 81 

(2014). Given this, Balles's advocacy on the female 

subordinate's behalf neither constituted a "false" 

representation nor resulted in damages to Babcock, and 

accordingly was not fraudulent.

B. Gross insubordination. Babcock maintains that Balles's 

conduct also constituted "gross insubordination" under clause 

(a) because he violated various company policies during his 

affair with the female subordinate. The trial judge, however,
18

interpreted the term "gross insubordination" to mean "more than 

just breaking generally applicable rules." He instead took it 

to mean the defiance of authority "such as [the violation of] a 

direct order . . . or disrespect directed to a supervisor 

personally." The judge found that Balles's conduct did not fall 

within this definition, noting that "there is no credible 

evidence of a direct order to Balles to do anything he failed to 

do," and that he did not "act disrespectfully to his superiors 

in person."

We defer to the judge's factual findings, but review de 

novo his interpretation of "gross insubordination" under the 

stockholders' agreement. Because the stockholders' agreement 

does not define "gross insubordination," it is appropriate to

look to other sources to determine the meaning of the term. See 

Meehan v. Shaughnessy, 404 Mass. 419, 445 n.22 (1989) 

(professional norms can supply meaningful definition of 

contractual term); Zeo v. Loomis, 246 Mass. 366, 368 (1923) 

("[Contract term] must be determined from all the circumstances 

according to the reasonable inferences presumably entertained by 

normal business [people]").

Babcock relies chiefly on Oehme v. Whittemore-Wright Co., 

279 Mass. 558, 563 (1932), which defines "insubordination" as "a 

wilful disregard of express or implied directions and refusal to 

obey reasonable orders." The company emphasizes the "implied 
19

directions" portion of the definition, presumably to suggest

that Balles's violations of company policy constituted gross 

insubordination. It is "gross insubordination," and not 

"insubordination," that gives rise to "[c]ause" under clause 

(a), however, and Oehme does not speak to the more egregious

misconduct required to establish gross insubordination.17 A

review of relevant case law indicates, as the judge concluded, 

that gross insubordination is generally defined as wilful

disregard of a direct order. See Hawkins v. Director of the 

Div. of Employment Sec., 392 Mass. 305, 306-307 (1984) 

(affirming review examiner's finding that twice refusing to 

comply with reasonable and legitimate requests by supervisor 

constituted "gross insubordination"); Stone v. Omaha, 229 Neb. 

10, 13-14 (1988) (employee's refusal to follow orders 

constituted gross insubordination). Given the judge's 

uncontested factual finding that Balles never disobeyed a direct 

order, his conduct did not constitute gross insubordination.

 

17 Moreover, clause (c) provides that a management 

investor's "willful and material breach of, or willful failure 

or refusal to perform and discharge, his duties, 

responsibilities or obligations to the [c]ompany" constitutes a 

predicate for "cause." Construing "gross insubordination" under 

clause (a) in the manner that Babcock advocates, i.e., as 

coterminous with the conduct outlined in clause (c), would 

render the latter section impermissibly superfluous. See Tupper

v. Hancock, 319 Mass. 105, 109 (1946) ("It is a canon of 

construction that every word and phrase of an instrument is if 

possible to be given meaning, and none is to be rejected as 

surplusage if any other course is rationally possible" [citation

omitted]).
20

ii. Clause (c). Babcock also maintains that Balles's 

conduct fell within clause (c), which defines "[c]ause" as

follows:

"the . . . willful and material breach of, or willful 

failure or refusal to perform and discharge, his duties, 

responsibilities or obligations to the [c]ompany . . . that 

is not corrected within thirty (30) days following written 

notice thereof to the [m]anagement [i]nvestor by the 

[c]ompany, such notice to state with specificity the nature 

of the breach, failure or refusal; provided, that if such 

breach, failure or refusal cannot reasonably be corrected 

within thirty (30) days of written notice thereof, such 

thirty (30) day period shall be extended for so long as may 

be reasonably necessary to correct the same."

Babcock argues that Balles's relationship with the female 

subordinate and his attempts to conceal it constituted a wilful 

and material breach of his obligation of loyalty to the company. 

Balles concedes that his conduct constituted a breach of loyalty 

under clause (c), but argues that Babcock failed to provide him 

with an opportunity to correct his breach, as required by clause 

(c). The company counters that, because Balles's breach could 

not be corrected, it was excused from the requirement of

offering him an opportunity to correct the breach, as to do so 

would have been futile.

The trial judge concluded that Babcock had failed to 

provide Balles with an opportunity to correct his breach in 

violation of clause (c) and that Balles's conduct was 

correctable. On appeal, Babcock argues that three particular
21

components of Balles's breach were uncorrectable:

18 (1) the 

effect of Balles's divided loyalty on his job performance during 

his affair with the female subordinate; (2) the harmful effects 

of Balles's example on company culture; and (3) the risk of a 

sexual harassment lawsuit caused by Balles's conduct.

We begin by noting that the futility exception upon which

Babcock relies is not expressly mentioned in the stockholders' 

agreement. Both parties nonetheless seem to accept the 

contention that truly futile gestures under the agreement are 

unnecessary, an assumption that accords with our common law. To 

excuse nonperformance in that respect, parties in breach of a 

contract may establish that compliance with the contract would 

have been futile. See Shawmut-Canton LLC v. Great Spring Waters 

of Am., Inc., 62 Mass. App. Ct. 330, 340 (2004). The exception, 

notably, is quite narrow, see Jefferson Ins. Co. of N.Y. v. 

National Union Fire Ins. Co. of Pittsburgh, Pa., 42 Mass. App. 

Ct. 94, 103 (1997) (rejecting interpretation of contract that 

"would have the exclusion swallow the policy" [citation

omitted]), and the party in breach bears the burden of proving 

that its performance under the contract would have been futile. 

See, e.g., 7-Eleven, Inc. v. Khan, 977 F. Supp. 2d 214, 230-231 

(2013) (party claiming that incurable breach relieved obligation 

 

18 We accept for the sake of argument the company's apparent 

assumption that, if any one aspect of Balles's breach is 

uncorrectable, the breach itself is uncorrectable.
22

to provide notice and opportunity to cure bore burden of proof). 

Ordinarily, futility is shown where performance under the 

contract would be impossible, see, e.g., L.K. Comstock & Co. v. 

United Engineers & Constructors Inc., 880 F.2d 219, 231-232 (9th 

Cir. 1989) (finding contractually guaranteed opportunity to cure 

would have been futile where party could not have cured its 

breaches in allotted time period), or where the other party had

first repudiated performance under the contract, see, e.g., 

Wolff & Munier, Inc. v. Whiting-Turner Contracting Co., 946 F.2d 

1003, 1009 (1991) (burden on party claiming incurable breach), 

neither of which took place here.

We nonetheless turn to Babcock's contention that, because 

Balles's breach cannot be corrected, its failure to provide him 

with an opportunity to do so falls within the narrow futility 

exception. Babcock first contends that Balles's breach of 

loyalty throughout his affair with the female subordinate could 

not be corrected because the correction provision "contemplates 

correction of the 'breach' itself -- not its future 

consequences." In the company's view, "'[c]orrection' presumes 

that the wrong has been righted, as though no breach happened," 

and a "'correctable' offense would have been one where, 

following a 'correction,' Babcock and Balles could have 

continued their association as before." We are unpersuaded by 

this argument, both because it relies on an implausible 
23

interpretation of the contract and because Babcock has not shown 

that Balles's breach was intrinsically incapable of correction.

By asserting that correction requires actually undoing the 

breach, rather than remedying its effects, Babcock would in 

effect read the correction provision out of clause (c). See

J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 795 (1986) 

("A contract is to be construed to give reasonable effect to 

each of its provisions"). As a practical matter, bells cannot 

be unrung, nor the past undone. Clause (c) contemplates that, 

in the event of a management investor's "willful and material 

breach of . . . duties, responsibilities or obligations to the

[c]ompany," the management investor will be given thirty days 

following written notice to "correct" that "breach, failure or 

refusal [to perform]." No exception is made for breaches of 

loyalty. The correction envisioned, reasonably construed within 

the context of that clause and the contract as a whole, can only 

be to remedy the adverse effects from the breach or 

nonperformance when performance will not itself be adequate or 

possible. See Downer & Co. v. STI Holding, Inc., 76 Mass. App. 

Ct. 786, 792 (2010) (objective in interpreting contract "is to 

construe the contract as a whole, in a reasonable and practical 

way, consistent with its language, background, and purpose" 

[citation omitted]).
24

Given the foregoing, Babcock has not met its burden of 

showing that the adverse effects of the breach were 

uncorrectable if Balles were given the opportunity to do so. 

Indeed, Babcock prevailed on its counterclaim when the judge 

deducted over $400,000 from the amount of Balles's salary

because of his breach of the duty of loyalty during his 

relationship with the female subordinate, thereby in essence 

compensating Babcock for the lost value of Balles's services in 

that period.

Babcock's contention that Balles's harm to company culture

was uncorrectable meets a similar fate. While the trial judge 

did not address this argument directly,

19 Babcock does not

establish why any such harms would not be remedied by the 

termination of Balles. The company's abrupt termination of 

Balles, a senior executive, surely made clear to other employees 

that his impermissible conduct would not be tolerated. The 

company's lone argument why this would not suffice is its 

insistence that only terminating Balles for cause could correct 

the harms he visited upon company values. This argument is at 

best circular, for if only terminating a management investor for 

cause adequately can correct his or her harm to company culture, 

 

19 The record does not disclose whether the argument was 

raised below. Any potential waiver issues are immaterial, 

however, given our disposition of the issue.
25

the correction provision itself would be for naught. See 

Jefferson Ins. Co. of N.Y., 42 Mass. App. Ct. at 103.

Babcock's final argument -- that the risk of a sexual 

harassment lawsuit brought by the female subordinate constituted 

uncorrectable harm to the corporation -- also lacks merit. The 

trial judge summarily dismissed this argument, determining that 

the stockholders' agreement pertains to "actual harm, not 

potential harm that never materialized." Even if the judge were 

incorrect in this and we were to assume that Balles's conduct in 

fact created a risk to the company that would not otherwise have 

existed, Babcock has not shown that the harm was uncorrectable. 

Risks are routinely adjusted and reallocated by various means 

such as indemnification agreements providing for the costs of 

defense, and such measures could presumably have been employed 

here.20 We accordingly reject Babcock's view that the risk of a 

sexual harassment claim brought by the female subordinate was 

uncorrectable.

21

 

20 As it stands, Babcock does not suggest that it engaged in 

any preparation for litigation or incurred any defense costs.

21 Although the trial judge did not appear to rely on this 

particular ground in rejecting Babcock's claim, "[a]n appellate 

court is free to affirm a ruling on grounds different from those 

relied on by the motion judge if the correct or preferred basis 

for affirmance is supported by the record and the findings." 

Commonwealth. v. Va Meng Joe, 425 Mass. 99, 102 (1997).
26

There was thus no error in the judge's determination that 

Babcock's failure to provide Balles with an opportunity to 

correct his breach prevents a finding of cause under clause (c).

c. Whether Balles committed a material breach of the 

stockholders' agreement. Babcock argues further that Balles 

committed a material breach of the stockholders' agreement, 

thereby precluding the recovery he seeks under it. The company 

maintains that Balles owed a fiduciary duty of loyalty to it as 

an officer and shareholder of a closely held corporation,22 and 

that, by committing a breach of this duty, he committed a 

material breach of the stockholders' agreement.

Even if Balles had committed a breach of a fiduciary duty 

owed to Babcock arising out of the stockholders' agreement,

Babcock's argument nonetheless fails as a matter of law. The 

rights of stockholders arising under a contract, as here, are 

governed solely by the contract. See Chokel v. Genzyme Corp., 

449 Mass. 272, 278 (2007) ("When rights of stockholders arise 

under a contract . . . the obligations of the parties are 

determined by reference to contract law, and not by the 

fiduciary principles that would otherwise govern"); Blank v. 

Chelmsford Ob/Gyn, P.C., 420 Mass. 404, 408 (1995) ("questions 

of good faith and loyalty with respect to rights on termination 

 

22 Babcock appears to argue that this fiduciary duty of 

loyalty arises directly out of the stockholders' agreement.
27

or stock purchase do not arise when all the stockholders in 

advance enter into agreements concerning termination of 

employment"); Donahue v. Rodd Electrotype Co. of New England, 

Inc., 367 Mass. 578, 598 n.24 (1975) (shareholders of close 

corporation may contract for "stock purchase arrangements" that 

would otherwise violate duties of loyalty and good faith to 

other shareholders if "stockholders give advance consent . . . 

through . . . a stockholders' agreement."). Contrast Prozinski

v. Northeast Real Estate Servs., LLC, 59 Mass. App. Ct. 599, 

608-610 (2003) (employee's breach of fiduciary duties to 

employer could constitute material breach barring recovery under 

employment agreement).

Sections 1 and 5 of the stockholders' agreement clearly 

address the rights of management investors as to their company 

stock holdings in the event of their termination. Section 5(e) 

provides that a management investor may only be divested of his 

or her stock if terminated for "cause." Section 1, in turn, 

sets forth a detailed, carefully crafted definition of "cause." 

Clause (c) of that definition specifically speaks to a 

management investor's rights in the event of termination for a 

material breach, including a breach of the duty of loyalty. 

Insofar as the stockholders' agreement speaks directly to the 

rights of a management investor in the event of the material 
28

breach alleged here, Balles is not precluded from seeking relief 

pursuant to its terms.

Judgment affirmed.