What you have typed in there actually doesn't produce foo   bar? Is that the actual code that replicates the problem? Because it doesn't cause me any trouble at all, assuming I use HTML::Entities;

Similarly, say decode_entities( encode_entities( 'this and that' ) ); produces exactly 'this and that' for me.

Is it possible that in reducing the example to minimal code you eliminated the problem without realizing it? Because I can't duplicate it with that code.

If the above code is giving you trouble I think we're going to need to know a little more about the rest of the neighborhood. That snippet cannot fail all by itself. What modules and pragmas are in use? Is there a character-set mismatch?