The correct option is C Incorrect = their, Correct = them
They is used to refer to the subject of a clause. In other words, it usually represents the ‘doers’ of the action. Them and him are used to refer to the object of a clause. In other words, they usually represent the group of people/person that have/has ‘experienced’ the action described by the verb. Hence, options A and B are wrong.
The number of people involved is not mentioned. However, we may infer from the word 'misunderstanding' that there are two people. So 'between' is correct in the given sentence, which rules out option D.
The correct answer is option C) incorrect= their, correct= them.