Three-way merge might not be the correct term. I mean it as in the three versions being "original", "version-a", and "version-b". Original is the most recent common ancestor of version-a and version-b. So the system can generate clean diffs based on that original version during the merge.

I've seen other systems essentially say, "Oops both versions modified this file... Good luck!" It didn't matter that the modifications were to very different parts of the file. I've never seen that in Git. Any merge conflict I've gotten in Git has been a true potential conflict, even if the resolution is straight-forward from my perspective.