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HTML Tidy is actually used in two different ways and is different to error checking.
The part that you can control with Tidy via the option is whether Tidy tries to clean up your styles/formatting, etc. when you save or switch views. Personally I turn this off as I prefer to use stylesheets and don't want the html modified from what I've set.
Tidy is also used to make the code look pretty on save (not always visible until you reload the book) - changing spaces, etc. This is automatic and not user-changeable. This should not change any code, just layout of the code/spacing and I personally find it very useful (even if not perfect).
The Well-Formed checking checks for errors in your html when saving/switching away from Code View. It has nothing to do with Tidy. And it should always be left on unless you really know what you are doing - with it off, it will automatically try to fix code when you save/switch from CV without telling you. Personally I always click on Fix Manually when it warns me about issues - although some people like it closing tags, I'd rather find what I forgot to do and fix it - and more importantly know exactly what was changed.
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