When another character at your location fails a check to defeat a monster, that character may discard a card to evade the monster, then you encounter it.
Non-Oloch-at-oloch's-location fails the check, the power triggers and they discard a card to evade it. No damage is done by my reading. Oloch then encounters the monster.
This is similar to "if you would fail the check, you can reroll the dice" powers on weapons. Am I reading this right?
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I'm not 100% sure what you're asking with the second part, but you're not quite correct on that first part. The encountering character has failed a check to defeat, so they take damage equal to the amount that they failed by. However, they can then discard a card to evade, saving them from any subsequent checks against the monster (such as an "after acting" power) and from consequences from the card being undefeated. So, they might take some damage, but many times it's probably still worth the discard to allow Oloch to take care of the card for them.
Edit: there was an FAQ. Lol. Oloch FAQ