Although similar in meaning, these words have different applications. Arbitrate means "to decide between contending or opposing parties or sides." An arbitrator actually hears evidence, arrives at a decision, and then makes an award. Mediate means "to act as an intermediary in a dispute," "to be a go-between." Arbitrators have no authority to mediate, just as mediators have no right to make ultimate decisions and issue awards. A mediator offers suggestions that may or may not be acceptable to contending parties; an arbitrator arrives at a solution intended to be binding upon both sides in a dispute: "The Family Court judge asked a marriage counselor to mediate the couple's disagreements." "An impartial expert was appointed to arbitrate the issue of fringe benefits."
Dictionary of problem words and expressions. Harry Shaw. 1975.