Can a Shimano BR-M965 caliper be replaced with a newer one?
The short answer is no, the Dual Control levers are not compatible with current calipers. 

Long answer: 

Both reasons you mention are valid. 

The master cylinder piston on a brake lever is sized very specifically for the caliper cylinder size, the type of hose, and the reservoir size. 

In addition, the hose fittings are pretty specific to year and model. They may work, they may seal short term, or they may not hold at all. 

Last, Shimano will not warrant brakes used with different combinations than designed. Which means that if you choose to mix and match a brake setup for a customer, the liability is on you. 

If their brakes fail, you are in a world of hurt. 

Great question, though. :)