These are explained briefly below. Arbitration is much like court litigation, except it is slightly less formal and usually much less expensive. It is dispute resolution conducted by private parties. There are many private arbitration providers, such as the American Arbitration Association, that provide full time, experienced arbitrators to decide cases. Commonly, one finds arbitration clauses in construction and labor contracts, although there is an increasing trend to include them in a wide variety of commercial settings.
Mediation is a procedure that is, for simplicity's sake, one step removed from arbitration.
It is a private, nonbinding method used to settle disputes without have a formal decision on the merits. Often, parties select a person whom they trust and who has experience in dealing with the issues at hand. For example, parties with a construction dispute may select a mediator to help them sort through the disputed issues that may have arisen in a given project. The mediator usually meets with both parties, with each party separately and attempts to bridge gaps and help the parties come to a mutually acceptable resolution. The key to mediation is that it is voluntary.