Yeah, I noticed that. Luckily, you can try as many times as you want. I can just use the Normal fight to recharge my Kindred Strikes and SP with the Essence Orb, then run away and get all my health back. I'll have to go and get the Bell Shell, though. I run out of potions, which makes me have to do the quest again.
Also, can you get the Underwyrmling from the normal battle, or do you NEED to beat the Challenge Battle? I know it's one of the best Fire pets out there due to its SP-draining attack.
The pen is mightier than the sword, and it also doesn't shred the paper.