Title: Balles v. Babcock Power Inc.
Citation: N/A
Docket Number: SJC-12112
State: Massachusetts
Issuer: Massachusetts Supreme Court
Date: March 6, 2017

NOTICE:  All slip opinions and orders are subject to formal 
revision and are superseded by the advance sheets and bound 
volumes of the Official Reports.  If you find a typographical 
error or other formal error, please notify the Reporter of 
Decisions, Supreme Judicial Court, John Adams Courthouse, 1 
Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-
1030; SJCReporter@sjc.state.ma.us 
 
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 full-
time 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 Babcock-
issued 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 jury-
waived 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.