Well, it was pretty clear Arwen had no/very little chance of winning-and if he did, there was a whole army waiting to step in. If I was running it, I could have made Cyanwrath just knock him out, not judging it worthy to even bother killing him-it wasn't much of a fight, and he obviously has some idea of honor. Then again, our intrepid fighter did go out of his way to antagonize the lizardknight...
But, from a story standpoint, setbacks can be just as defining as victories. I figure that's what this is. You should have hard choices and dangerous moments in your campaigns to make things exciting. Even Gandalf died...for a little while.
Still, it'd be pretty unfair for Arwen to be killed here. Then again, life is unfair.
I mean, honestly, it doesn't demean his sacrifice-he knew what he what was getting into, and knew full well he could probably going to die to save those civilians. If there was really no risk to him, or any of us-it cheapens the encounter and the entire campaign. Johanna just ran through a hoard of monsters with less than 10 HP and no spells. I could have run back to the keep, but I didn't. I knew full well I could die if I was in the wrong spot at the time.
The encounter has evil GM written all over it, but it's not unfair. We could have sent the captain out, right? Or decided that charging Cyanwrath here and now and attacking his army would spare many more lives than the ones we sacrificed. Could have played this many ways.
Ultimately, what makes it different than a plotkill is the fact we were given a choice. As long as we have a choice, I'm fine with it.