**Exhibit 10.20**
**AMENDED AND RESTATED EMPLOYMENT AGREEMENT**
     THISAMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “**Agreement**”) is dated as of February 8,2005 (the “**Effective Date**”), and is entered into by and between THE HOUSTON EXPLORATION COMPANY, aDelaware corporation (the “**Company**”), and JOHN H. KARNES (the “**Executive**”).
**WITNESSETH:**
     **WHEREAS,**the Company and the Executive entered into an employment agreement dated November 18,2002 (the “**Prior Agreement**”), and
     **WHEREAS,**the Company and the Executive mutually agree to terminate the Prior Agreement, andhereby covenant that the Prior Agreement shall be null and void and have no further effect, and
     **WHEREAS,**the Company and the Executive wish to enter in this Agreement setting forth the termsand conditions of the Executive’s employment with the Company.
     **NOW, THEREFORE,**in consideration of the premises and for other good and valuableconsideration, the receipt and sufficiency of which are hereby acknowledged, the Company and theExecutive hereby agree as follows:
     **1. Termination of Prior Agreement.**The Executive and the Company hereby agree to terminatethe Prior Agreement and relinquish all rights, obligations, payments and benefits provided thereinin consideration for the employment terms and conditions set forth in this Agreement. ThisAgreement shall supersede any and all obligations (other than any obligations relating to accrued,but unused vacation or Executive’s right, if any, to his 2004 bonus) and terms set forth in thePrior Agreement.
     **2. Employment and Term of Employment.**Subject to the terms and conditions of this Agreement,the Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve theCompany as Senior Vice President and Chief Financial Officer for a term (the “**Term of Employment**”)beginning on the Effective Date and ending on the Expiration Date (defined below). As used herein,“**Expiration Date**” means the third anniversary of the Effective Date, provided that on the firstanniversary of the Effective Date and on each subsequent anniversary of the Effective Date (suchfirst anniversary date and each such subsequent anniversary date being referred to as a “**RenewalDate**”), the Expiration Date shall be automatically extended one additional year unless, not lessthan ninety (90) days prior to the relevant Renewal Date, (i) either party shall have given writtennotice to the other that no such automatic extension shall occur after the date of such notice or(ii) either party shall have given a Notice of Termination to the other pursuant to Section 9hereof. Notwithstanding the foregoing, if either party gives a valid Notice of Terminationpursuant to Section 9 hereof, the Term of
1

 

Employment shall not extend beyond the termination date specified in such Notice ofTermination.
     **3.    Scope of Employment.**
     **(a)**During the Term of Employment, the Executive agrees to (i) serve as Senior VicePresident and Chief Financial Officer of the Company (or in such other position of equal orgreater authority) and shall have and may exercise all the powers, duties and functions asare normal and customary to such positions and that are consistent with the responsibilitiesset forth with respect to such positions in the Company’s bylaws and (ii) perform such otherduties not inconsistent with his position as are assigned to him, from time to time, by theCompany. During the Term of Employment, the Executive shall devote substantially all of hisbusiness time, attention, skill and efforts to the faithful performance of his dutieshereunder. Subject to Section 8, the foregoing shall not be construed to prevent theExecutive from making investments in businesses or enterprises so long as such investmentsdo not require any services on the part of the Executive in the operation of such businessor enterprises of a nature or magnitude that would interfere materially with the performanceof his duties hereunder.
     **(b)**During the Term of Employment, the Executive agrees to serve, if elected, as anofficer or director of any subsidiary or affiliate of the Company so long as such service iscommensurate with the Executive’s duties and responsibilities to the Company.
     **(c)**The Executive’s place of employment hereunder shall be at the Company’s principalexecutive offices in the greater Houston, Texas metropolitan area. Moreover, the Companyagrees that it will provide immunity and indemnity for the Executive to the fullest extentallowed by law, that if necessary it will amend its certificate of incorporation and bylawsto so provide, and that it will obtain errors and omissions insurance in the amount of noless than Ten Million Dollars ($10,000,000) naming the Executive as an additional insured.
     **4.    Compensation.**During the Term of Employment, in consideration of the Executive’s serviceshereunder, including, without limitation, service as an officer or director of the Company or ofany subsidiary or affiliate thereof, and in consideration of the Executive’s covenants regardingconfidentiality in Section 7 hereof and noncompetition in Section 8 hereof, the Executive shallreceive the following compensation:
     **(a)**Base Salary. The Executive shall be paid a base salary at the rate of Two HundredNinety-Five Thousand Dollars ($295,000) per year (the “**Base Salary**”) (payable at suchregular intervals as other employees of the Company are compensated in accordance with theCompany’s employment practices), which amount shall be subject to review annually by theBoard of Directors of the Company (the “**Board**”) or the Compensation Committee of the Board(the “Compensation Committee”) and may be adjusted at its discretion, provided that suchBase Salary may not be reduced at any time.
     **(b)**Target Bonus. During the Term of Employment, The Executive shall also be entitledto an annual target bonus equal to fifty-five percent (55%) of the Executive’s
2

 

Base Salary (the “**Target Bonus**”) upon the achievement of pre-established performance goals set by theBoard or the Compensation Committee of the Board. Any such bonus shall be paid at suchtimes as the Company customarily pays bonuses and shall be paid consistent with Companypolicies.
     **5.    Additional Compensation and Benefits.**
     **(a)**As additional compensation for the Executive’s services under this Agreement, theExecutive’s covenants regarding confidentiality in Section 7 hereof and noncompetition inSection 8 hereof, during the Term of Employment, the Company agrees to provide the Executivewith such other benefits as it provides to its employees from time to time and subject tothe eligibility provisions of any such employee benefit plans and policies. Executiveshall be eligible for leave or vacation time (not less than five (5) weeks per year).
     **(b)**The Executive shall be eligible to participate in the Company’s SupplementalExecutive Retirement Plan (“**SERP**”), to the extent that the Board has adopted a SERP. TheExecutive’s retirement benefits under the SERP shall be determined and paid in accordancewith the terms of the SERP plan document.
     **(c)**The Board shall have the discretion to make equity grants to Executive under theCompany’s Long Term Incentive Plan.
     **(d)**The Executive is authorized to incur reasonable business expenses for promoting thebusiness and reputation of the Company, including (without limitation) reasonableexpenditures for travel, lodging, club memberships, meals and client, patron, customerand/or business associate entertainment. The Company shall reimburse within thirty (30)days the Executive for reasonable expenses incurred by the Executive in furtherance of theCompany’s business, provided that such expenses are incurred in accordance with theCompany’s policies and upon presentation of documentation in accordance with expensereimbursement policies of the Company as they may exist from time to time, and submission tothe Company of adequate documentation in accordance with federal income tax regulations andadministrative pronouncements.
     **(e)**During the Term of Employment, the Company shall pay to Executive an automobileallowance of Seven Hundred Dollars ($700) per month.
     **6.    Contract Severance.**In consideration for the termination of the Executive’s PriorAgreement, the Company hereby agrees to provide the Executive with a restricted stock grant (the“Contract Severance”) as soon as administratively practicable following the Effective Date, (the“Grant Date”) consisting of 12,892 shares of the Company’s common stock which shall be subject tocertain restrictions (the “Restricted Stock”). The Restricted Stock shall be granted subject tothe terms of the Company’s Long Term Incentive Plan and shall vested as provided therein.
3

 

     **7.    Confidentiality and Other Matters.**
     **(a)**Confidentiality. The Executive shall hold in a fiduciary capacity for the benefitof the Company all maps, data, reports, including results of exploration, drilling, drillcores, cuttings, and other samples, and other information relating to the business of theCompany which comes into the possession of the Executive during the Term of Employment (suchinformation being collectively referred to herein as the “**Confidential Information**”).During the Term of Employment and after termination of the Executive’s employment hereunder,the Executive agrees: (i) to take all such precautions as may be reasonably necessary toprevent the disclosure to any third party of any of the Confidential Information; (ii) notto use for the Executive’s own benefit any of the Confidential Information; and (iii) not toaid any other person or entity in the use of the Confidential Information in competitionwith the Company, provided that nothing in this Agreement shall prohibit the Executive fromdisclosing or using any Confidential Information (A) in the performance of his dutieshereunder, (B) as required by applicable law, (C) in connection with the enforcement of hisrights under this Agreement or any other agreement with the Company, (D) in connection withthe defense or settlement of any claim, suit or action brought or threatened against theExecutive by or in the right of the Company or (E) with the prior written consent of theBoard. Notwithstanding any provision contained herein to the contrary, the term“**Confidential Information**” shall not be deemed to include any general knowledge, skills orexperience acquired by the Executive or any knowledge or information known or available tothe public in general. The Executive further agrees that, if requested by the Company inwriting at any time within ninety (90) days after termination of his employment for anyreason, he will surrender to the Company all Confidential Information, and any copiesthereof, in his possession and agrees that all such materials, and copies thereof, are atall times the property of the Company. Notwithstanding the foregoing, the Executive shall bepermitted to retain copies of, or have access to, all such Confidential Information relatingto any disagreement, dispute or litigation (pending or threatened) involving the Executive.
     **(b)**Remedies. For purposes of this Section 7, the “**Company**” shall be defined as theCompany and its affiliated companies including (without limitation) its successors andassigns and its subsidiaries and each of their respective successors and assigns. In theevent of a breach or threatened breach by the Executive of the provisions of this Section 7,the Company shall be entitled to an injunction restraining the Executive from violating suchprovisions without the necessity of posting a bond therefor. Nothing herein shall beconstrued as prohibiting the Company from pursuing any other remedies available to it at lawor in equity. Except as specifically set forth herein, the parties agree that theprovisions of this Section 7 shall survive the earlier termination of the Executive’semployment with the Company, as the continuation of this covenant is necessary for theprotection of the Company.
     **8.    Noncompetition.**
     **(a)**Noncompetition Activities. The Executive acknowledges that the nature of theemployment under this Agreement is such as will bring the Executive in personal
4

 

contact with patrons or customers of the Company and will enable him to acquirevaluable information as to the nature and character of the business of the Company, therebyenabling him, by engaging in a competing business in his own behalf, or for another, to takeadvantage of such knowledge and thereby gain an unfair advantage. Accordingly, theExecutive covenants and agrees that he will not, without the prior written consent of theCompany during the Term of Employment, and for the period of one year thereafter, engagedirectly or indirectly for himself, or as an agent, representative, officer, director oremployee of others, in the exploration for or production of oil and gas in Louisiana, Texas,Arkansas, Oklahoma, Colorado, North Dakota, South Dakota and the coastal area of the Gulf ofMexico from the Mexican border to the eastern boarder of Louisiana provided, that, theforegoing restriction shall not apply at any time if the Executive’s employment isterminated during the Term of Employment by the Executive for Good Reason (defined inSection 9 hereof) or by the Company for any reason other than Cause (defined in Section 9hereof) and, provided further, that nothing in this Agreement shall prohibit the Executivefrom acquiring or holding any issue of stock or securities of any entity registered underSection 12 of the Securities and Exchange Act of 1934 (as amended), listed on a nationalsecurities exchange or quoted on the automated quotation system of the National Associationof Securities Dealers, Inc. so long as the Executive is not deemed to be an “affiliate” ofsuch entity as such term is used in paragraphs (c) and (d) of Rule 145 under the SecuritiesAct of 1933 (as amended).
     **(b)**Scope. In the event that the provisions of this Section 8 should ever be deemed toexceed the time, geographic or activity related limitations permitted by applicable law,then such provisions shall be reformed to the maximum time, geographic or activity relatedlimitations permitted by applicable law. In the event of a breach or threatened breach bythe Executive of the provisions of this Section 8, the Company shall be entitled to aninjunction restraining the Executive from violating such provisions without the necessity ofposting a bond therefor. Nothing herein shall be construed as prohibiting the Company frompursuing any other remedies available to it at law or in equity. Except as specifically setforth herein, the parties agree that this Section 8 shall remain in effect for its full termnotwithstanding the earlier termination of the Executive’s employment with the Company, asthe continuation of this covenant is necessary for the protection of the Company. Forpurposes of this Section 8, the “**Company**” shall be defined as the Company and its affiliatedcompanies, including (without limitation) its successors and assigns and its subsidiariesand each of their respective successors and assigns.
     **9.    Termination.**
     **(a)**General. The Executive’s employment hereunder shall automatically terminate on theearlier of his death or the Expiration Date. The Executive may, at any time prior to theExpiration Date, terminate his employment hereunder for any reason by delivering a Notice ofTermination (defined below) to the Board. The Company may, at any time prior to theExpiration Date, terminate the Executive’s employment hereunder for any reason by deliveringa Notice of Termination to the Executive, provided that in no event shall the Company beentitled to terminate the Executive’s employment prior to the Expiration Date unless theBoard shall duly adopt, by the affirmative vote of a least a
5

 

majority of the entire membership of the Board (excluding Executive if he should thenbe serving on the Board), a resolution authorizing such termination and stating whether suchtermination is for Cause (defined below). The giving of a notice pursuant to clause (i) ofthe proviso contained in the penultimate sentence of Section 2 hereof shall not be deemed atermination of the Executive’s employment by the party giving such notice. As used in thisAgreement, “**Notice of Termination**” means a notice in writing purporting to terminate theExecutive’s employment in accordance with this Section 9, which notice shall (i) specify theeffective date of such termination (not prior to the date of such notice) and (ii) in thecase of a termination by the Company for Cause or Disability or a termination by theExecutive for Good Reason or Disability, set forth in reasonable detail the reason for suchtermination and the facts and circumstances claimed to provide a basis for such termination.
     **(b)**Automatic Termination on Expiration Date. In the event the Executive’s employmenthereunder shall automatically terminate on the Expiration Date for any reason, the Executiveshall only be entitled to receive (i) all unpaid Base Salary earned as of the terminationdate (ii) all unused vacation time accrued by the Executive as of the termination date, and(iii) those benefits which are required under the Employee Retirement Income Security Act of1974, as amended (“**ERISA**”), or other laws or any other amounts due and owing to theExecutive under any of the Company’s employee benefit plans or policies on or following histermination of employment (the **“Accrued Obligation”**). The amounts described in clauses (i)and (ii) of the foregoing sentence shall be paid to the Executive in a lump sum paymentpromptly after the Expiration Date.
     **(c)**Termination by Company for Cause or by Executive without Good Reason. If theCompany terminates the Executive’s employment for Cause or the Executive terminates hisemployment without Good Reason, the Executive shall only be entitled to receive the AccruedObligations. Executive shall provide the Company at least thirty (30) days advance writtennotice of his termination of employment without Good Reason. As used in this Agreement,“**Cause**” shall mean (i) any failure of the Executive to (A) perform his principal dutiesspecified in Section 3 of this Agreement in any material respect (other than any suchfailure resulting from the Executive’s incapacity due to illness or other disability), (B)comply with any material provision of this Agreement (other than Section 7 or 8), or (C)comply with any material provision of the Company’s ethics, code of conduct or otheremployment policies, in each case in (A) through (C) above after written notice of suchfailure has been given to the Executive by the Board and such failure shall have continuedfor thirty (30) days after receipt of such notice, (ii) Executive’s grossly negligent orintentional misconduct which is either materially detrimental to the Company’s financialinterests and reputation, or which would legally prevent the Executive from serving in thecapacity he was hired to serve, (iii) a material breach by the Executive of any materialprovision in Sections 7 or 8 of this Agreement, or (iv) conviction of or plea of guilty orno contest by the Executive of a felony or any other criminal offense involving moralturpitude any of which has or have a material adverse effect on the Executive’s ability toperform the duties of his position or on the financial condition or profitability of theCompany.
6

 

     **(d)**Death or Disability. To provide for the event the Executive’s employment isautomatically terminated on account of his death or is terminated by either the Company orthe Executive on account of Disability (defined below), the Company shall purchase andprovide for the Executive life insurance in the amount of one times annual salary and shallpurchase and provide for the Executive supplemental executive long-term disability benefits(to the extent necessary to provide the total benefits described herein, net of theCompany’s existing group long-term disability plan) to provide salary replacement in theamount of sixty percent (60%) of annual salary at the date of disability (to continue untilat least age sixty-five (65), or for life if reasonably practicable). As used herein,“**Disability**” means any physical or mental condition of the Executive that (i) prevents theExecutive from being able to perform the services required under this Agreement, (ii) hascontinued for at least one hundred eighty (180) consecutive days during any twelve (12)month period and (iii) is reasonably expected to continue. The Company’s obligation toprovide to the Executive long-term disability benefits hereunder shall be defined by thelong-term disability benefits contract it is able to procure from an unrelated third party.For that purpose, the definition of disability shall be as stated in the contract. TheCompany and the Executive recognize that the definition of Disability hereunder may differfrom the contract definition and the benefits payable shall be those as stated in thecontract. The Company, however, agrees to use good faith efforts to obtain a contract witha definition of disability as similar as possible to the definition stated hereunder.Moreover, the Company and the Executive agree that for purposes of the other provisions ofthis Agreement, including the right of the Company to terminate the Executive, thedefinition of Disability as stated herein shall control.
In addition, upon the Executive’s termination of employment under this clause (d), theExecutive shall be paid and/or provided the Accrued Obligations, and any vesting, lapse oftime, performance condition or similar requirement under any stock option plan, restrictedstock or other non-qualified deferred compensation plan shall be accelerated to the date ofsuch termination and any conditions to the Executive’s entitlement to any benefits under anyof such plans or programs shall be deemed to have been satisfied.
     **(e)**Termination by Company Without Cause or by the Executive with Good Reason. Ifeither the Company terminates the Executive’s employment for any reason other than for Causeor on account of Disability or the Executive terminates his employment for Good Reason (ashereinafter defined), the Company shall:
     **(i)**pay to the Executive, within thirty (30) days after the date of suchtermination, a lump sum cash payment equal to 2.99 times the Executive’s thencurrent annual rate of Total Compensation;
     **(ii)**pay or provide the Executive the Accrued Obligations; and
     **(iii)**pay Executive’s COBRA premiums for continuation coverage under theCompany’s group health plan for the lesser of (a) twelve (12) months following thedate of termination; (b) until such time as Executive is no longer eligible forCOBRA coverage; or (c) until such time as Executive becomes eligible for comparablebenefits from a subsequent employer.
7

 

In addition, any vesting, lapse of time, performance condition or similar requirement underany stock option plan, restricted stock or other non-qualified deferred compensation planshall be accelerated to the date of such termination and any conditions to the Executive’sentitlement to any benefits under any of such plans or programs shall be deemed to have beensatisfied.
The Executive shall have “**Good Reason**” to terminate his employment hereunder within thirty(30) days following his knowledge of any of the events set forth below which have not beencured by the Company within fifteen (15) days following Executive’s written notice of theoccurrence of any such events: (A) a material and adverse change in the powers, duties,responsibilities or functions of the Executive as described in Section 3 hereof; or (B)subject to the last sentence of this paragraph, any material and adverse change in theExecutive’s relative position in the Company’s management structure; or (C) without theExecutive’s prior written consent, the relocation of the Company’s principal executiveoffices outside the greater Houston, Texas metropolitan area or requiring the Executive tobe based other than at such principal executive offices, of the Company; or (D) the failureof the Company to obtain any assumption agreement required by Section 18 hereof; or (E) anyreduction in the level of Executive’s Base Salary or Target Bonus, or the failure by theCompany to pay the Executive within ten (10) days after a written demand therefor anyinstallment of any previous award of or deferred compensation, if any, which he is due andowing under any employee benefit plan or any deferred compensation program in effect inwhich the Executive may have participated; or (F) any other material breach of thisAgreement by the Company. Notwithstanding anything to the contrary in this Section 9(e), nochange of Executive’s relative position in the Company’s management structure (which doesnot otherwise materially and adversely change the powers, duties, responsibilities orfunctions of the Executive as described in Section 3) shall constitute Good Reason unlessand until the occurrence of a Change in Control (as defined in the Company’s Long TermIncentive Plan), it being understood that prior to a Change in Control, the Chief ExecutiveOfficer shall have discretion to make organizational changes affecting the Executive in theinterest of effective corporate management as the Chief Executive Officer may determine fromtime to time.
As used in this Agreement, the term “**Total Compensation**” shall mean the sum of thefollowing:
     **(i)**the current annual rate of Base Salary of the Executive and;
     **(ii)**the Executive’s Target Bonus for the year of termination; and
     **(iii)**the current annual car allowance provided by the Company to theExecutive.
     **(f)**Certain Additional Payments by the Company. Anything in this Agreement to thecontrary notwithstanding, in the event it shall be determined that any payment ordistribution by the Company to or for the benefit of the Executive, whether
8

 

paid or payable or distributed or distributable pursuant to the terms of this Agreementor otherwise (a “**Payment**”), would be subject to the excise tax imposed by Section 4999 ofthe Code or any interest or penalties with respect to such excise tax (such excise tax,together with any such interest and penalties, are hereinafter collectively referred to asthe “**Excise Tax**”), then the Executive shall be entitled to receive an additional payment (a“**Gross-Up Payment**”) in an amount such that after payment by the Executive of all taxes(including any interest or penalties imposed with respect to such taxes), including anyExcise Tax imposed upon the Gross Up Payment, the Executive retains an amount of the GrossUp Payment equal to the Excise Tax imposed upon the Payments. Subject to the provisions ofthis Section 9(f), all determinations required to be made hereunder, including whether aGross Up Payment is required and the amount of such Gross Up Payment, shall be made by theaccounting firm which at the time audits the financial statements of the Company (the“**Accounting Firm**”) at the sole expense of the Company, which shall provide detailedsupporting calculations both to the Company and the Executive within fifteen (15) businessdays of the date of termination of the Executive’s employment under this Agreement, ifapplicable, or such earlier time as is requested by the Company. If the Accounting Firmdetermines that no Excise Tax is payable by the Executive, the Accounting Firm shall furnishthe Executive with an opinion that he has substantial authority not to report any Excise Taxon his federal income tax return. Any determination by the Accounting Firm shall be bindingupon the Company and the Executive. As a result of the uncertainty in the application ofSection 4999 of the Code at the time of the initial determination by the Accounting Firmhereunder, it is possible that Gross Up Payments, which will not have been made by theCompany should have been made (an “**Underpayment**”), consistent with the calculations requiredto be made hereunder. If the Company exhausts its remedies pursuant hereto and theExecutive thereafter is required to make a payment of any Excise Tax, the Accounting Firmshall determine the amount of the Underpayment that has occurred and any such Underpaymentshall be promptly paid by the Company to or for the benefit of the Executive.
     The Executive shall notify the Company in writing of any claim by the Internal RevenueService that, if successful, would require the payment by the Company of the Gross UpPayment. Such notification shall be given as soon as practicable but no later than ten (10)business days after the Executive knows of such claim and shall apprise the Company of thenature of such claim and the date on which such claim is requested to be paid. TheExecutive shall not pay such claim prior to the expiration of the thirty (30) day periodfollowing the date on which it gives such notice to the Company (or such shorter periodending on the date that any payment of taxes with respect to such claim is due). If theCompany notifies the Executive in writing prior to the expiration of such period that itdesires to contest such claim, the Executive shall:
     **(i)**give the Company any information reasonably requested by the Companyrelating to such claim,
     **(ii)**take such action in connection with contesting such claim as the Companyshall reasonably request in writing from time to time, including
9

 

(without limitation) accepting legal representation with respect to such claimby an attorney reasonably selected by the Company,
     **(iii)**cooperate with the Company in good faith to effectively contest suchclaim, and
     **(iv)**permit the Company to participate in any proceedings relating to suchclaim;
provided, that, the Company shall bear and pay directly all costs andexpenses (including additional interest and penalties) incurred in connection with suchcontest and shall indemnify and hold the Executive harmless, on an after-tax basis, for anyExcise Tax or income tax, including interest and penalties with respect thereto, imposed asa result of such representation and payment of costs and expenses. Without limitation on theforegoing provisions hereof the Company shall control all proceedings taken in connectionwith such contest and, at its sole option, may pursue or forego any and all administrativeappeals, proceedings, hearings and conferences with the taxing authority in respect of suchclaim and may, at its sole option, either direct the Executive to pay the tax claimed andsue for a refund or contest the claim in any permissible manner, and the Executive agrees toprosecute such contest to a determination before any administrative tribunal, in a court ofinitial jurisdiction and in one or more appellate courts, as the Company shall determine,provided that if the Company directs the Executive to pay such claim and sue for a refund,the Company shall advance the amount of such payment to the Executive, on an interest-freebasis and shall indemnify and hold the Executive harmless, on an after-tax basis, from anyExcise Tax or income tax, including interest or penalties with respect thereto, imposed withrespect to such advance or with respect to any imputed income with respect to such advance,and further provided that any extension of the statute of limitations relating to payment oftaxes for the taxable year of the Executive with respect to which such contested amount isclaimed to be due is limited solely to such contested amount. Furthermore, the Company’scontrol of the contest shall be limited to issues with respect to which a Gross Up Paymentwould be payable hereunder and the Executive shall be entitled to settle or contest, as thecase may be, any other issue raised by the Internal Revenue Service or any other taxingauthority.
     If, after the receipt by the Executive of an amount advanced by the Company pursuanthereto, the Executive becomes entitled to receive any refund with respect to such claim, theExecutive shall (subject to the Company’s complying with the requirements hereof) promptlypay to the Company the amount of such refund (together with any interest paid or creditedthereon after taxes applicable thereto). If, after the receipt by the Executive of an amountadvanced by the Company pursuant hereto, a determination is made that the Executive shallnot be entitled to any refund with respect to such claim and the Company does not notify theExecutive in writing of its intent to contest such denial of refund prior to the expirationof thirty (30) days after such determination, then such advance shall be forgiven and shallnot be required to be repaid and the amount of such advance shall offset, to the extentthereof, the amount of Gross Up Payment required to be paid.
10

 

     **(g)**Either party may, within fifteen (15) days after receipt of a Notice of Terminationfrom the other party, provide notice to the other party that a dispute exists concerning thetermination, in which event the dispute shall be resolved in accordance with Section 11hereof. If such dispute should commence during the one year period immediately following aChange in Control, notwithstanding the pendency of any such dispute and notwithstanding anyprovision of this Agreement to the contrary, the Company will (i) continue to pay theExecutive his Base Salary and (ii) continue the Executive as a participant in allcompensation and benefit plans in which the Executive was participating when the relevantNotice of Termination was given, until the dispute is finally resolved or, with respect to aNotice of Termination given by the Executive, the date of termination specified in suchNotice of Termination if earlier, but, in each case, not past the Expiration Date;providedthat, the Company may elect to terminate the Executive withoutCause at anytime and upon satisfying its obligations under Section 9(e) hereof, itsobligations under this Section 9(g) shall cease. If (i) the Company give a Notice ofTermination to the Executive, (ii) the Executive disputes the termination as contemplated bythis paragraph (g), and (iii) such dispute is resolved in favor of the Company, theExecutive shall be required to refund to the Company any amounts paid to the Executive underthis paragraph (g) but only if, and then only to the extent, the Executive is not otherwiseentitled to receive such amounts under this Agreement.
     **10.  Non-exclusivity of Rights.11.**Nothing in this Agreement shall prevent or limit theExecutive’s continuing or future participation in any benefit, bonus, incentive or other plan orprogram provided by the Company or any of its affiliated companies and for which the Executive mayqualify, nor shall anything herein limit or otherwise affect such rights as the Executive may haveunder any stock option or other agreements with the Company or any of its affiliated companies.Amounts which are vested benefits or which the Executive is otherwise entitled to receive under anyplan or program of the Company or any of its affiliated companies at or subsequent to the date oftermination of the Executive’s employment under this Agreement shall be payable in accordance withsuch plan or program.
     **11.  Resolution of Disputes.**
     **(a)**Negotiation. The parties shall attempt in good faith to resolve any disputearising out of or relating to this Agreement promptly by negotiations between the Executiveand an executive officer of the Company who has authority to settle the controversy. Anyparty may give the other party written notice of any dispute not resolved in the normalcourse of business. Within ten (10) days after the effective date of such notice, theExecutive and an executive officer of the Company shall meet at a mutually acceptable timeand place within the Houston, Texas metropolitan area, and thereafter as often as theyreasonably deem necessary, to exchange relevant information and to attempt to resolve thedispute. If the matter has not been resolved within thirty (30) days of the disputingparty’s notice, or if the parties fail to meet within ten (10) days, either party mayinitiate arbitration of the controversy or claim as provided hereinafter. If a negotiatorintends to be accompanied at a meeting by an attorney, the other negotiator shall be givenat least three (3) business days’ notice of such intention and may also be accompanied by an attorney. All negotiations pursuant to this Section 11(a) shall be
11

 

treated as compromise and settlement negotiations for the purposes of the federal and staterules of evidence and procedure.
     **(b)**Arbitration. Any dispute arising out of or relating to this Agreement or thebreach, termination or validity thereof, which has not been resolved by nonbinding means asprovided in Section 11(a) within sixty (60) days of the initiation of such procedure, shallbe finally settled by arbitration conducted expeditiously in accordance with the Center forPublic Resources, Inc. (“**CPR**”) Rules for Non Administered Arbitration of Business Disputesby three (3) independent and impartial arbitrators, of whom each party shall appoint one,provided that if one party has requested the other to participate in a nonbinding procedureand the other has failed to participate, the requesting party may initiate arbitrationbefore the expiration of such period. Any such arbitration shall take place in HarrisCounty, Texas. Any arbitrator not appointed by a party shall be appointed from the CPRPanels of Neutrals. The arbitration shall be governed by the United States Arbitration Actand any judgment upon the award decided upon by the arbitrators may be entered by any courthaving jurisdiction thereof. Each party hereby acknowledges that compensatory damagesinclude (without limitation) any benefit or right of indemnification given by another partyto the other under this Agreement.
     **12. Expenses.**The losing party shall pay all reasonable costs and expenses, including,without limitation, court costs and attorneys’ fees, incurred by the other party as a result of anyclaim, action or proceeding, arising out of, or challenging the validity or enforceability of, thisAgreement or any provision hereof; provided, that, if any such claim, action orproceeding shall commence within the one year period immediately following a Change in Control, theCompany shall pay all expenses and legal fees incurred by the Executive in such dispute, regardlessof outcome, unless it is determined that the Executive acted in bad faith and without a reasonablebelief that he would prevail in such claim, action or proceeding.
     **13. Governing Law.**This Agreement shall be governed by and construed in accordance with theinternal laws of the State of Texas. Venue and jurisdiction of any act on relating to thisagreement shall lie in Harris County, Texas.
     **14. Notice.**Any notice, payment, demand or communication required or permitted to be given bythis Agreement shall be deemed to have been sufficiently given or served for all purposes ifdelivered personally or if sent by registered or certified mall, return receipt requested, postageprepaid, addressed to such party at its address set forth below such party’s signature to thisAgreement or to such other address as shall have been furnished in writing by such party for whomthe communication is intended. Any such notice shall be deemed to be given on the date sodelivered.
     **15. Severability.**In the event any provisions hereof shall he modified or held ineffective by any court, suchadjudication shall not invalidate or render ineffective the balance of the provisions hereof.
12

 

     **16. Entire Agreement.**This Agreement constitutes the sole agreement between the parties withrespect to the employment of the Executive by the Company and supersedes any and all otheragreements, including the Prior Agreement and any other oral or written agreement, between theparties.
     **17. Amendment and Waiver.**This Agreement may not be modified or amended except by a writingsigned by the parties. Any waiver or breach of any of the terms of this Agreement shall notoperate as a waiver of any other breach of such terms or conditions, or any other terms orconditions, nor shall any failure to enforce any provisions hereof operate as a waiver of suchprovision or any other provision hereof.
     **18. Assignment.**This Agreement is a personal employment contract and the rights and interestsof the Executive hereunder may not be sold, transferred, assigned or pledged. The Company mayassign its rights under this Agreement to (i) any entity into or with which the Company is mergedor consolidated or to which the Company transfers all or substantially all of its assets or (ii)any entity, which at the time of such assignment, controls, is under common control with, or iscontrolled by the Company, provided that the Company will require any successor (whether direct orindirect, by purchase, merger, consolidation or otherwise) to all or substantially all of thebusiness and/or assets of the Company, to expressly assume and agree to perform this Agreement inthe same manner and to the same extent that the Company would be required to perform it if not suchsuccession had taken place.
     **19. Successors.**This Agreement shall be binding upon and inure to the benefit of theExecutive and his heirs, executors, administrators and legal representatives. This Agreement shallbe binding upon and inure to the benefit of the Company and its successors and assigns.
     **20. Section Headings.**The section headings in this Agreement have been inserted forconvenience and shall not be used for interpretive purposes or to otherwise construe thisAgreement.
     **21. No Mitigation or Set-off.**The provisions of this Agreement are not intended to, nor shallthey be construed to, require that the Executive mitigate the amount of any payment provided for inthis Agreement by seeking or accepting other employment, nor shall the amount of any paymentprovided for in this Agreement be reduced by any compensation earned by the Executive as a resultof his employment by another employer or otherwise. The Company’s obligations to make the payments to the Executive required under this Agreement and otherwise to perform itsobligations hereunder shall not be affected by any set off, counterclaim, recoupment, defense orother claim, right or action that the Company may have against the Executive.
[Remainder of page intentionally left blank]
13

 

     **IN WITNESS WHEREOF,**the parties hereto have executed this Agreement as of the date firstwritten above and intend that this Agreement have the effect of a sealed instrument.        **EXECUTIVE**       /s/ JOHN H. KARNES  **JOHN H. KARNES**       **THE HOUSTON EXPLORATION COMPANY**      By:  /s/ WILLIAM G. HARGETT     Name:  William G. Hargett Title:  Chairman, President and ChiefExecutive Officer
14