I find it hard to believe theres no fail-safe for this kind of situation? Like how do I open the watch in DFU mode?
Ah! That's the really fascinating part about Activation Lock.
You see, Apple's Activation Lock is a security feature, not a convenience feature, and as such it's designed to
"fail secure", not
"fail safe". In other words if it "fails" in any sense of the word - for instance through failure to provide the proper credentials - it assumes the worst has happened and remains secured.
In this case the "worst" would be that the watch was stolen, or simply ended up in the hands of a person who wasn't planning to return it to the original owner. Think of your (former?) dear friend for example. Imagine if before he had a chance to give the watch to you he had lost it, and it was found by someone he didn't want to have it.
Now imagine if Activation Lock could be bypassed, for example by using a DFU mode. Perhaps that DFU mode wiped the watch so no personal information would ever end up in the wrong hands. That would still mean that people who found an Apple Watch would be tempted to keep it rather than return it, since the watch is valuable and perhaps they have an older model (or no Apple Watch to begin with). That would be a serious flaw in a security feature intended to keep the watch safe - after all, if stealing something is pointless, it's less likely to happen.
Since the Activation Lock can't be bypassed or disabled without the right credentials, however, there's more incentive for people to return the watch to its rightful owner. It's really clever that way!