What it means
Arbitration is a form of alternative dispute resolution where the parties present their case to a private, independent arbitrator (or panel) who makes a binding decision called an 'award'. It is often chosen for commercial and international contracts because it is private and can be faster than litigation. Many contracts contain an arbitration clause requiring disputes to be arbitrated rather than litigated. In Australia, arbitration is supported by legislation, and awards are generally final with only limited rights of appeal or challenge.
How it's used
Their supply agreement required any dispute to go to arbitration, so the parties appointed an arbitrator instead of going to court.