This happens when working on a Diff depending on another Diff.
STEPS TO REPRODUCE
$ arc feature foo $ <hack> $ git commit -am "First diff" $ arc diff # This creates a first Diff $ arc feature bar foo $ <hack> $ git commit -am "Second diff" $ arc diff
WHAT HAPPENS
It tries to update the first Diff.
WHAT SHOULD HAPPEN
It creates a new Diff with only the difference to the tracking branch (here, foo).
WORKAROUND
Last step, instead of arc diff, do arc diff foo. It will create a second Diff, only containing the diff with foo.