Rabbi Eliezer ben R. Yossi says, “It is forbidden for a judge to arbitrate a compromise.” It is certainly permissible for disputants to settle out of court, or to ask an arbitrator to help them. However, once they come to court, the judge who arbitrates a compromise shows that in his opinion the compromise settlement is more correct than an appropriate ruling based on Torah law. Furthermore, in settlement the would-be winner is robbed of some money.
Rabbi Yehoshua ben Korcha says on the contrary that before the verdict it is a meritorious deed for a judge to arbitrate a compromise - “...execute truth and judgment of piece...”, and “judgment of piece” means compromise - like king David, who “...rendered judgment and righteousness...” And Rabbi Eliezer explains that king David would render a strict judgment first, but then if the loosing party was poor, he would pay his own money.
Art: Louis Katzenstein - Anthony van Dyck at the Court of Charles I