Unlock with Apple Watch

I managed to fix this issue without repairing my watch. Steps were:

  Open settings, privacy & security, general and uncheck open with apple watch.
  Open Keychain Access, under View menu make sure 'show hidden items' is enabled.
  Search for 'auto unlock' select all the auto unlock entries, right click and delete them.
  Search for 'autounlock' select all the autounlock entries, right click and delete them (some will instantly reappear).
  Restarted Mac.
  Open settings, privacy & security, general - then make sure your apple watch is unlocked and your iphone is unlocked and both near the mac. Then check open with apple watch.

Sorted!