According to reports in Australian media, legal documents tendered in the Melbourne court showed that Arthur had felt like "meat in the sandwich" in the divisive feud between Clarke and Watson.
Arthur, who was shown the door days before the Ashes series and two years before his contract was due to expire, has reportedly sought payments and compensation amounting to AUD 4 million or his job back from cricket Australia to the end of his 2015 contract.
According to documents lodged by Arthur as part of his claim against Cricket Australia, the South African has reportedly detailed some of the dressing room acrimony which marred the team's on-field performances this year. "There was major tension between Michael Clarke and Shane Watson," Channel Seven reported from Arthur's document of claim.
The 45-year-old South African, who was replaced by former Australia batsman Darren Lehmann, had to deal with the rift between Clarke and Watson ever since his appointment in November 2011, reports said. In the documents, Arthur also claimed that he was racially discriminated against because he was South African and didn't understand the Australian way.
Arthur, who was under-fire for Australia's poor show especially on the India tour and Champions trophy, and was also criticised because of the disciplinary issues within the camp, claimed that he didn't get the support from Cricket Australia when he and Clarke had dropped four players, including then vice-captain Watson for the third Test in India
Arthur also alleged that Watson had told him about the bar-room brawl where Australia opener David Warner had punched England batsman Joe Root during the Champions Trophy, which resulted in the Australian batsman being suspended in the team's lead-up games to the Ashes.
"We're disappointed it has come to this position, but Cricket Australia is confident in its position on this matter and I'm sure it will get resolved in an appropriate fashion," CA lawyer Dean Kino told Seven.
Watson had earlier denied any involvement in bringing the incident to Arthur's attention, saying "it had absolutely nothing to do with me". Arthur's manager, Rossco Barrat, did not like to comment on the pending legal action but said that he was already in talks about landing the South African's next job.
"We believe that Mickey has got a lot to offer world cricket and I'm exploring opportunities for him," Barrat said. Cricket Australia general manager of legal and business affairs Dean Kino said: "We're disappointed that it's come to this. CA is quite clear on its position on this matter and I'm sure it will get resolved in the appropriate fashion."
Australia had 10 victories, six defeats and three draws under Arthur since he became the first foreign-born coach of the national team, succeeding Tim Nielsen in November 2011.