Watch 3 does not have enough storage for update

To Free-Up Storage

For songs, see the "Remove music from Apple Watch" section in:

Add music to Apple Watch - Apple Support

and for pictures, see the "Limit photo storage on Apple Watch section in:

Choose a photo album and manage storage on Apple Watch - Apple Support

Also, try unpairing and pairing your watch again and restoring from the backup just created in the unpairing process. This deletes all temp and corrupted files and re-indexes the file system.

Unpair and erase your Apple Watch - Apple Support

Set up your Apple Watch - Apple Support

Also see:

If you don’t have enough space to update your Apple Watch - Apple Support

Unpair your Apple Watch via the Watch app on your iPhone.

Then Re-pair your Apple Watch,this deletes temporary and corrupted files

and also clears the system cache freeing up a surprisingly large amount of storage space.And without any loss of data.

For a 400mb update , this is ridiculous.