We logged a ticket with Sitecore for this and they acknowledged and provided a patch (KB0676973) to resolve the error.
After the patch, selecting a file from search results works fine if the item belongs to the location defined in "source"works fine if the item belongs to the location defined in "source". You will get the same error when a file outside of "source" location is selected. Sitecore support suggested that we implement code at our end to restrict the search to the "source" location as opposed to showing the content from the entire site.