The situation is pretty much as you described it. Waterstones has sold you an ePub file which cannot be displayed on the Sony Reader. Waterstones (if you get past their first level tech support) should be very well aware of the issue, however it is not a problem that they can fix as that has to be done by the publisher which creates the file.
You will need to negotiate with Waterstones if you want a refund.
Out of curiousity, what was the title and publisher for the file in question?
Yeah, I thought that was pretty much the case. I'll have to argue my case with Waterstones.
The book was Terry Pratchett's The Last Continent. The publisher on Waterstones is listed as Transworld Digital but on DE it says Random House Ebooks. I've had Random House Ebooks before without a problem but I think they may have been listed as published by Corgi.
Nicholas Crane's book Clear Waters Rising gives the same error.