Example:

A contractor has completed the project works satisfactorily in accordance with the contract, and applies for its final 10% payment from the project owner, as is provided by the contract.  The project owner has spent more on the project than it had budgeted, and wishes to make cost savings.  It therefore determines that it will attempt to reduce the contractor’s final payment by 5%.  It therefore sends the contractor a schedule of purported defects in the works.  The schedule is false.  There is nothing actually wrong with these items of works, and the project owner knows this to be the case.  The project owner calculates that the rectification of these issues will cost the equivalent of 10% of the contract price.  This calculation is false.  The project owner then sets off the alleged cost of rectification of these defects against the balance due to the contractor, with the outcome that nothing further is paid by the project owner to the contractor.  The contractor disputes the deduction.  The project owner offers to pay the contractor a reduced final payment of 5% immediately, but informs the contractor that, if the contractor does not accept this reduced sum, then the project owner will pay nothing, and the contractor will have to go to court if it wishes to obtain any payment from the project owner.  The contractor cannot afford a court action, and is experiencing cash flow difficulties, so it accepts the reduced amount of 5%.

Explanation:

The project owner commits fraud by deliberately creating a false list of defects, and by forcing the contractor to accept a lower payment through its threat of requiring the contractor to have to go to court to receive a payment it was already due. 

It is legitimate to refuse to pay for work which is genuinely defective or not undertaken.  It is also legitimate to threaten legal action if you honestly believe that your claim is justified.  However, you cannot fabricate defects, or threaten the necessity of legal action based on a claim which you know is false, in order to make a profit.