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You are mixing up two things.

What you suggest, is exactly what I said should be done. You can say, "heck no we won't pay," and hope the contractor accepts your take on it and agrees not to make a stink. That's what most people will choose to do in these circumstances.

But you have no actual legal right to do so. The contract is for work done, and you cannot withhold it based on other factors if they did the CONTRACTED work. Despite the fact they may have also embezzled while performing said work. Not legally. Now if you decide to make a point of it, call his bluff and hope he won't sure you over it (and you counter-sue him for the theft) that's fine. But you still have no actual legal right to withhold payment for contracted services that were completed.

What you suggest is a negotiating tactic, and a common and viable one. It has no basis in law though.
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