Hi GMATMadeEasy,
As you know, the correct sentence should communicate the "intended meaning" and it should communicate that meaning without any ambiguity.
That being said, I am not aware of any rule that governs the usage of "with" vs "who or which".
So I would be able to help you better if you could provide me with the doubts that you had with OG questions where usage of "with" was correct and incorrect.
However, I will still try to address your query about the two versions of the sentence that you provided.
Between the two versions that you have stated, I feel that Choice#2 is more appropriately worded. Choice#1 does not have any grammatical error but if I have these two choices, then I will select Choice 2 as the correct answer. I feel that 1 is not as precise as 2.
1. The student with the highest grade was rewarded.
Analysis: This choice somehow implies that the student owns the highest grade or that the highest grade is a property of the student. It may also imply something non-sensical as - student with the highest class was rewarded. This is assuming the meaning of the word 'grade' as 'class'.
Consider for example the following two sentences:
- I like the music system with 3 speakers. - Here the music system "physically possesses or owns the 3 speakers".
I like the house with green color - Here "with green color" is a property of the house.
At the same time, the following two versions are also correct:
- I like the music system that has 3 speakers.
I like the house that is green in color.
2. The student who received the highest grade was rewarded
This sentence is absolutely correct.
I hope this helped a bit.
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