An arbitration is typically a less formal proceeding in which one or more arbitrators decide questions of law and fact. The arbitrators are typically selected through some previously agreed upon procedure. In most lawsuits the judge orders the case to non-binding arbitration in an attempt to get the case resolved short of a trial. Because the goal is to reach agreement, the result of a successful mediation is, by its very nature, final. Mediation can often resolve a case in a day.
Mediation has no effect on later disputes, except perhaps psychological.
Each procedure has a number of advantages and disadvantages. A lawsuit provides the most flexibility, both in terms of ability to obtain information to support your claims, and in terms of ability to appeal a decision you believe is incorrect. However, a lawsuit usually takes the longest and is usually costlier. Arbitration is typically far quicker and cheaper than a lawsuit, but your ability to obtain information from the other side is generally quite limited. Also, it provides the parties the most control over the outcome of their dispute, for the reason that any resolution is one they agree to.