I’ve had the same issue after updating to VS2013 Update 2.
I’ve solved the issue by temporarily cutting the whole system.serviceModel section out of web.config, pasting it somewhere else like Notepad. Then, I’ve saved the web.config without the service model section. Then, I was able to update the service reference successfully. After updating the service reference, I’ve pasted the service model section back to web.config and it worked successfully.