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late 14c., "absolute decision," from Old French arbitracion, from Latin arbitrationem (nominative arbitratio) "judgment, will," noun of action from past participle stem of arbitrari "to be of an opinion, give a decision," from arbiter (see arbiter). Meaning "settlement of a dispute by a third party" is from 1630s.
The settling of disputes (especially labor disputes) between two parties by an impartial third party, whose decision the contending parties agree to accept. Arbitration is often used to resolve conflict diplomatically to prevent a more serious confrontation.