Is the outrage here down to the idea that authority has been questioned or the OP has a weird concept of defamation?
As a former instructor/examiner (not I might add for the CAA) I am well aware that everyone, myself included, makes mistakes. Personally I would watch to see if the mistakes made were self corrected. Might I suggest that correct flight following techniques as discussed above should have settled any altimeter setting discrepancies. Some examiners are more pedantic than others but that is just the nature of the game I'm afraid.
We are also all aware that poling the aircraft around the sky is not the most demanding aspect of a skill test. The ability to be aware of your position in the 3d space and the ability to maintain a high level of situational awareness with respect to other GA/OA traffic is also paramount. The mis-setting of an altimeter is, IMHO, irrelevant. What is relevant is that the setting was never checked again during the flight.
The examiner in this case had his reasons not to pass the student and, regardless of debriefing technique, those reasons must have been communicated back to the CAA on the relevant forms and the student as to the reason why they didn't pass. End of story. Unless there was a blindingly obvious reason to question the decision ( i.e. Luke Skytoddlers tale where a mistake was obviously made) then get on with the re-test. There is no 'shame' and, in my experience, an employer will perhaps ask why you needed to re-test but that's about it. They certainly will ask why a student felt it necessary to sue the CAA and that would put me on guard as to the suitability of the person in front of me.
We live in a time where many people think they have a right to sue for whatever reason they feel necessary. In some cases justified, in this case not.