"Cannot lose" does not mean "win". When the player with For the Watch! has the first challenge initiated against him, there are three possible outcomes.
- He declares no defenders, but the attacking player cannot win, so nobody wins. (Usually this happens)
- He declares some defenders, but not enough to win, so nobody wins. (This should never happen)
- He declares enough defenders to win. (Sometimes this happens, to trigger effects like Shadow Tower and Sword in the Darkness.)
- For the Watch nullifies the first challenge "each phase" even though challenges can normally only be initiated during the challenge phase because it's possible that future card abilities or game rules will allow for challenges outside of the challenges phase. For example, in first edition there were "epic battle" phases, and a character that allowed it's controller to initiate a military challenge when he was killed (frequently during the plot phase).