Sofotel Bhd is a telecommunications company. In preparation for a promotional campaign, Sofotel engaged Tonetoys Corp (China) to manufacture three million fridge magnets with its mascot called 'Buddy the Orang Utan'. The contract was FOB (Shenzhen) at RM200,000. Sofotel opened a credit in Tonetoy's favour with the ODDC Bank. Pan Asia Bank in China issued a letter of credit to Tonetoys as beneficiary. The letter of credit was stated to be governed by the UCP600 Rules. Sofotel insured the consignment for RM200,000 with an 'all risk' coverage.

Once the goods were loaded on board the vessel (The Mauvais), Tonetoys air-mailed the clean bill of lading and other documents to Sofotel, together with a sample of the fridge magnet manufactured pursuant to the contract. Mariam, the marketing manager at Sofotel, was shocked that the fridge magnet contains a glaring error - it misspelled the mascot as 'Baddy the Orang Utan'. Mariam made inquiries with Tonetoys and discovered that the entire consignment of three million fridge magnets was affected by the error. Sofotel immediately instructed ODDC Bank not to honour the credit. ODDC Bank communicated this fact to the Pan Asia Bank.

Approaching the Straits of Malacca, The Mauvais encountered pirates. Some cargo were destroyed, including Tonetoys' consignment. Sofotel was not disappointed, because it did not intend to take delivery of the goods should they arrive. In the course of filing for the claim, Mariam made this fact known to the insurer. The insurer now refuses pay-out on the basis that Sofotel had not disclosed this fact prior to the issuance of the policy.

Tonetoys's demand for payment was not met. Moreover, Sofotel intends to sue Tonetoys for breach of contract. The contract contains a clause stating in the event of a dispute arising from the contract, the matter shall be resolved by arbitration. Sofotel plans to commence legal action in the High Court at Kuala Lumpur.

Answer the following questions:

(a) Is Tonetoys entitled to payment pursuant to the letter of credit? (10 marks)

(b) Is Sofotel entitled to insurance pay-out in respect of the consignment? (10 marks)