I may be mis-understanding, but I don't think this guy IS a "sub" contractor. If this company hires a contractor, and that contractor hires someone else, then yes, he's a sub. Is that what happened here? In that case there would be NO check directly to the "sub" contractor, so the OP's statement that there was a last "paycheck" would make no sense. The contractor would pay the sub, not the OP's company.

And yes, this company does still have to pay the contractor. Sure, you could ask for/expect chargeback for losses incurred by the sub, but the contractor would have to agree to that. My clients deal with chargebacks for E&O all the time, and there are offsets against contracts all the time. But it is always a mutual decision & an agreed-upon credit - usually done for the purposes of keeping good relations between main company and contracting company.

Again, you cannot unilaterally void a contract or do an offset. Not unless the CONTRACT says you can. You may FEEL you should be able to do so, but you cannot usually. Now, if you do so and the guy doesn't fight it, fine. But that doesn't mean he cannot fight it.