The world these days just amazes me! Your dog behaved perfectly, the other guy's dog came up growling and he reacted! I'm not sure what you or your dog "should" have done differently, but what if that dog had gone after you or your niece, would you really want your dog muzzled and vulnerable in that situation? If that guy doesn't want his dog's neck further perforated (by other dogs he meets in that fashion) he should up his training or keep him on a leash! At least that's how I'd look at it.
It's not the size of the dog in the fight, it's the size of the fight in the dog. Mark Twain