Arbitration is a dispute that is settled outside of the court, where a neutral third party acts as the adjudicator.  The parties usually agree for their case to be decided by an arbitrator, although it can be mandatory at times. 

Whatever final decision the arbitrator makes, the parties are legally bound by his or her decision.  However, if the parties agree beforehand that the decision will not be binding, then it is not.  In this case, the parties may request a trial de novo.

The advantages of having one's case subjected to arbitration are that it is usually much faster and cheaper than litigation.  Also, it is more difficult to appeal damages resulting from arbitration.  Finally, results from arbitration are generally not made public, unlike decisions made in a courtroom by a judge.

Arbitration should not be confused other forms of ADR, such as mediation.

Mediation differs from arbitration in that the neutral third-party presiding over the case is not present to render a final verdict.  Instead, a mediator's job is to serve as a middleman in attempts to help the opposing parties reach a negotiation agreement. 

Only when the parties reach a final agreement is it considered legally binding.  While a mediator does not usually advise the parties on different matters, his or her job is to use a variety of tactics that are aimed to help the parties negotiate properly and reach a settlement.

Mediation may be voluntarily agreed to by the parties.  However, a judge can also order the parties to attempt to mediate the matter between them in an effort to avoid litigation.  If the parties cannot settle their dispute, they may then return to the courtroom.

The biggest benefits of mediation, like arbitration, are that it is much faster, and often cheaper, than litigation.  Instead of long, drawn-out, nasty lawsuits, mediation can often be accomplished within just a few hours of actually sitting together with the opposing party or parties and talking through the dispute.

Furthermore, the fate of the parties involved in mediation is in their own hands, and it is only limited by the parties' stubbornness, the difficulty of the issues, their abilities to negotiate, etc.  Creative solutions found during mediation are often times options that a judge, jury, etc. would not have made available.  Finally, as in arbitration, settlements reached during mediation are also confidential.