The Devious Boat Merchant starts automatically when you pay the Boat Merchant at the Ugdan Harbor dock 1000 Ducats. Once you find out that he sold you a small boat and not a ship, he flees towards the Praios Square. There you can find him talking to the Shady Character, boasting about his masterstroke. But when you corner him and confront him, he will give you back the 1000 Ducats.