A lawsuit takes place in a government-run court system, with proceedings and filings generally accessible to the public, and it is presided over by a judge or, in some cases, decided by a jury.

Arbitration is typically a private proceeding conducted outside the court system, often before an arbitrator selected by the parties or an arbitration organization, and the proceedings and outcome are usually confidential.

Most arbitration happens because the parties agreed to it in advance, commonly through an arbitration clause in an employment agreement, consumer contract, or business agreement, requiring disputes to be resolved through arbitration instead of a lawsuit.

These clauses are generally enforceable, and courts will often compel arbitration and dismiss or pause a lawsuit if a valid arbitration agreement covers the dispute at issue.

Arbitration typically involves more limited discovery than a lawsuit, meaning less formal exchange of documents and information between the parties before the hearing.

Arbitration also generally applies relaxed rules of evidence compared to a courtroom trial, and the grounds to challenge or appeal an arbitrator's decision are usually much narrower than the grounds available to appeal a court judgment.

Arbitration is often faster and less expensive than full litigation, and its private nature can be appealing to parties who don't want a dispute playing out in public court records.

The tradeoff is that arbitration offers less procedural protection, less opportunity to gather evidence from the other side, and a much more limited path to challenge a decision that turns out badly, which is an important consideration before agreeing to an arbitration clause.