What's the difference between the two types of fillings/lawsuits?
This is an apples-to-oranges comparison. Proceedings to compel arbitration address the question of where to litigate a dispute. There a party seeks to enforce a method for dispute resolution that the counterparty is trying to elude. Declaratory action indicates a type of relief which has the form of preemptively outlining the parties' rights and obligations should an injury materialize in the future.
Although the parties could resort to arbitration for declaratory relief, typically arbitration is sought only after the injury has occurred. Arbitration for purposes of declaratory relief essentially amounts to asking the arbitrator to determine the "correct" and binding interpretation of a contract.
Note that the WikiHow resource to which you refer contains some mischaracterizations. One example is the assertion that "federal courts have a strong policy of favoring arbitration". A recent answer provides legal precedents clarifying that arbitration is to be enforced by virtue of being premised on some contract (or maybe some statute) rather than because of judicial preference. A policy preference for or against arbitration is within legislator's province, not something for courts to override by means of "policies".
Also the notion, stated in that article, that many people are familiar with responding to a complaint by moving to compel arbitration is irrelevant and highly doubtful.
The article would have been more productive if it warned that arbitration rulings are significantly harder to reverse than those from court proceedings. In part, that difference is because:
- "[i]n deciding whether the arbitrator exceeded its authority,
[courts] resolve all doubts in favor of arbitration", Executone
Information Systems, Inc. v. Davis, 26 F.3d 1314, 1320 (1994) (note that the Executone appellate opinion refers to arbitrator's conclusions, which is different from asserting that courts prefer to compel arbitration);
- "even if [the court] does not agree with the arbitrators'
interpretation of the contract[,] [...] the standard of review of
arbitration awards requires [courts] to defer to the arbitrators'
interpretation of the contract [...] [whereas the] court need not be
so deferential to the district court's judgment", Anderman/Smith
Co. v. Tenn. Gas Pipeline Co., 918 F.2d 1215, 1218-1219, n1
(1990), "[j]udicial review of arbitration awards is extremely
limited", Id. at 1218; and
- "[w]hether or not the [Arbitrator]'s findings are supported by the
evidence in the record is beyond the scope of [the Court's] review",
Lagstein v. Certain Underwriters, Lloyd's, London, 607 F.3d 634,
In what circumstances should each one be used?
For reasons stated in the preceding paragraph, arbitration entails a high risk of arbitrator's subjectivity (arbitrariness) and therefore should be avoided whenever possible. The easiest way to avoid it is by declining to sign agreements that establish arbitration as "alternative method for dispute resolution".