Arbitration is a form of alternative dispute resolution (ADR), and is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons by whose decision they agree to be bound.
It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.
Arbitration is most commonly used for the resolution of commercial disputes. Arbitration can be either voluntary or mandatory (although mandatory arbitration can only come from a contract that is voluntarily entered into, where the parties agree to hold all disputes to arbitration, without knowing, specifically, what disputes will ever occur) and can be either binding or non-binding.
Non-binding arbitration is, on the surface, similar to mediation. However, the principal distinction is that whereas a mediator will try to help the parties find a middle ground on which to compromise, the (non-binding) arbitrator remains totally removed from the settlement process and will only give a determination of liability and, if appropriate, an indication of the quantum of damages payable.
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