Theresa May's Government fear a series of defeats
This could involve getting a re-write of the European Union (Withdrawal) Bill to include a cross-party amendment that would require ministers to negotiate "an arrangement which enables the United Kingdom to continue participating in a customs union with the EU".
It does not explicitly say that Britain must reach a deal on such a union.
That stance widened divisions within the party and raised the prospect of defeat in the upper House of Lords, where the Conservatives do not command a majority.
The government is expected to suffer several defeats in the Lords over the remaining stages of the debate in the coming weeks. At the very least, it will add to the pressure on her to execute a U-turn and stay in a customs union.
'A failure to do so however, will amount to kicking the can down what could be a very rocky road.
Sky's Political Editor Faisal Islam said the size of the defeat is "bad news" for the Government and suggests there will be many more such amendments when the bill returns to the Commons next month.
It's unclear whether the amendment will survive when the bill becomes law.
Peers voted in favour of the amendment to the flagship EU Withdrawal Bill by 348 votes to 225, a majority of 123. While May has repeatedly ruled out staying in the customs union as it would prevent Britain having its own trade policy, some in her administration back the idea. However, another official said the clause only requires the government to explain what it has done to try to stay in a customs union - something it could easily do with no impact on policy.
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The opposition Labour party has argued at different times that Britain must remain in the Customs' Union to preserve the economic unity and peace in Ireland.
The amendment requires the government to report to Parliament by October 31 on what steps it has taken to remain in the customs union, which allows goods to flow freely across the European Union.
Asked if May had a message for peers, her spokesman said he would not pre-empt parliament.
The Prime Minister's official spokesman said: '(Mrs May) has been very clear that the British people voted to leave the European Union and expect us to be able to sign trade deals around the world, operating our own independent trade policy.
Labour, which supports the amendment, believes that it can count on all but two or three of its Brexit-supporting MPs to vote against the government on the issue.
"I certainly know a number of Tories who I won't name, but who are absolutely going to vote with us on the customs union", said Hayter.
With talks on a future trade deal getting underway in Brussels this week, and with her team gaining in confidence after winning global support for her tough stance on Syria, May might hope she can weather the embarrassment.
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