If there are only 2 people in a lane, you can each stay on one side of the lane. Since doing this essentially divides one lane into two, it's called splitting.
Circle swimming is where everyone always stays to their apparent right side of the lane. This means people facing the opposite direction will be on your left so will pass by safely. You can accomodate a lot of people in a lane when circle swimming if they are reasonably closely matched in speed.
If you are being overtaken while circle swimming, just stay as far right as you can, it's up to the passer to make sure the other side is clear and they can get by safely. If you want to be nice when you are starting out, if you are about to be overtaken, stop at the wall and squeeze to the side until the passer makes their turn. But this is not a requirement, more advanced swimmers usually won't do this, especially if they are doing interval training.
Competitive swimmers prefer circle swimming because it's what they are used to and you won't have to stop and reorganize everything if a third person gets in the lane. A lot of recreational swimmers prefer lane splitting, because they either don't know any better, think lane splitting will dissuade anyone else from getting in their lane, or are simply territorial jerks.
As usual, communication is the best way to avoid problems.
Alex