The South African was sacked just 16 days before the first Test against Ashes-holders England at Trent Bridge this month and replaced as Australia coach by former Test batsman Darren Lehmann.
Reports said Arthur, fired two years before his contract was due to expire, was seeking up to Aus$4 million (US$3.69 million) in compensation, claiming he was discriminated against because he was South African and "didn't understand the Australian way".
Clarke allegedly described the role of Watson and his faction as a "cancer" with Arthur calling himself the "meat in the sandwich" between the conflicting camps.
England had problems of their own last year when Kevin Pietersen, after scoring a superb Test hundred against his native South Africa at Headingley, was briefly dropped from the side for allegedly sending text messages critical of then England captain Andrew Strauss, who has since retired, to Proteas players.