There seems to be a lot of confusion about arbitration. Judging by recent media accounts, it’s a crooked business designed by thieves for the purpose of cheating the virtuous.

Richard Cordray, director of the Consumer Financial Protection Bureau, was recently quoted in this newspaper saying, “Consumers should not be asked to sign away their legal rights when they open a banking account or credit card. Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing.”

Cordray is right. But arbitration is not the problem. The situation is more complicated than that.

Let’s start with a review of some terms. If two parties have a dispute, the simplest thing they can do is sit down and discuss it until they reach a settlement. That is negotiation. If they can’t reach a settlement by themselves, they might call in a neutral third party to help them negotiate. That person is a mediator, and that process is mediation.

If a settlement is not possible, the parties might ask a neutral third party to listen to the case and make a decision. That’s arbitration.

Negotiation, mediation and arbitration are all alternative dispute resolution, or ADR, mechanisms; they take place outside the court system. ADR exists because the court system is complicated, slow, formal and expensive. Courts are essential in the conduct of civil society, but they are not ideally suited for the resolution of many ordinary disputes.

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