I'm sure most everyone on HN has read it already, but "What Colour are your bits?" http://ansuz.sooke.bc.ca/entry/23 is always a good reference in this sort of discussion. The system you mention sounds like what the Colour essay is railing against; trying to create a mathematical solution to a problem which is rooted in the law, and cannot be resolved by mathematical manipulations, but only by legal manipulations.
Do you recall the title or author of that paper? I'd be interested in reading about the contradiction argument you mention.