Yoiks: you have to put double quotes round the +L argument:
ffihugs +G +L"\"foo bar\"" Baz
The shell strips away unescaped double/single quotes, so this shouldn't come as much of a surprise (and isn't really a Hugs issue, per se.)
The point was that you don't need this with hugs but do with runhugs (and, hence, with ffihugs).
If you don't want to support multiple -L options on a single command line, I don't really see a way out beside adding an escaped set of quotes.
I was thinking in terms of moving the argument parsing hack out of server.c and into runhugs. I hadn't really thought about how I'd do this - maybe have 'parse lots of options' and 'parse one option' entrypoints. Allowing multiple -L options per line would be easier though and we'd only encounter the problem when passing filenames with spaces in them to hugs - probably only happens on windows.
Works fine here (i.e., compilation failures are reported as errors.)
Haven't tried yet whether your recent commit fixes this - but I wonder if you're using something more recent than win98? A