Was this caused by arc flash or just short circuit without any arc flash?
Most probable casue was a bad contact, it wasn't tighted well. I can see the healthy connection next to it - it's a wrong connection. The wires has to reside in the bottom of the lug, tightening the screw you compress wires and bottom of the lug.

The wire lost contact with the lug, but the distance from lug and wire was so small, that the electric field easily break the air, making an arc. This resulted like everthing is OK, the current was flowing and the appliance worked, but with help of an arc.

This is also one of the causes why houses get on fire.