Compilation error after update to Idea 2016.3

After updating to 2016.3, scala/java project using java 1.7, start failing on compilation phase with the following errors:

Error:scala: error while loading AnnotatedElement, class file '/Library/Java/JavaVirtualMachines/jdk1.8.0_51.jdk/Contents/Home/jre/lib/rt.jar(java/lang/reflect/AnnotatedElement.class)' is broken
(class java.lang.RuntimeException/bad constant pool tag 18 at byte 76)
Error:scala: error while loading CharSequence, class file '/Library/Java/JavaVirtualMachines/jdk1.8.0_51.jdk/Contents/Home/jre/lib/rt.jar(java/lang/CharSequence.class)' is broken
(class java.lang.RuntimeException/bad constant pool tag 18 at byte 10)
Error:scala: error while loading ConcurrentMap, class file '/Library/Java/JavaVirtualMachines/jdk1.8.0_51.jdk/Contents/Home/jre/lib/rt.jar(java/util/concurrent/ConcurrentMap.class)' is broken
(class java.lang.RuntimeException/bad constant pool tag 18 at byte 61)
Error:scala: error while loading Comparator, class file '/Library/Java/JavaVirtualMachines/jdk1.8.0_51.jdk/Contents/Home/jre/lib/rt.jar(java/util/Comparator.class)' is broken
(class java.lang.RuntimeException/bad constant pool tag 18 at byte 20)
Error:scala: error while loading Entry, class file '/Library/Java/JavaVirtualMachines/jdk1.8.0_51.jdk/Contents/Home/jre/lib/rt.jar(java/util/Map$Entry.class)' is broken
(class java.lang.RuntimeException/bad constant pool tag 18 at byte 10)
Error:scala: error while loading Pattern, class file '/Library/Java/JavaVirtualMachines/jdk1.8.0_51.jdk/Contents/Home/jre/lib/rt.jar(java/util/regex/Pattern.class)' is broken
(class java.lang.RuntimeException/bad constant pool tag 18 at byte 1753)

I just don't get why for compilation it uses JDK that Idea boots with rather than specified in Project Structure.