The settlement of the Oudh question was reserved to the last. The home authorities had begged Dalhousie to prolong his tenure of office during the Crimean War, but the difficulties of the problem no less than complications elsewhere had induced him to delay operations. In 1854 he appointed Outram as resident at the court of Lucknow, directing him to submit a report on the condition of the province. This was furnished in March 1855. But though the state of disorder and misrule revealed by it called for prompt remedy, Dalhousie, looking at the treaty of 1801, considered that he was bound to proceed in the matter of reform with the king's consent. He proposed, therefore, to demand a transfer to the Company of the entire administration, the king merely retaining his royal rank, certain privileges in the courts, and a liberal allowance. If he should refuse this arrangement, a general rising was almost certain to follow, and then the British government would of necessity intervene on its own terms. On the 21st of November 1855 the court of directors instructed Dalhousie to assume the powers essential to the permanence of good government in Oudh, and to give the king no option unless he was sure that his majesty would surrender the administration rather than risk a revolution. Dalhousie was in wretched health and on the eve of retirement when the belated orders reached him; but he at once laid down instructions for Outram in every detail, moved up troops, and elaborated a scheme of government with particular orders as to conciliating local opinion. The king refused to sign the treaty put before him, and a proclamation annexing the province was therefore issued on the 13th of February 1856.
Only one important matter now remained to him before quitting office. The insurrection of the half-civilized Kolarian Santals of Bengal against the extortions of landlords and money-lenders had been severely repressed, but the causes of the insurrection had still to be reviewed and a remedy provided. By removing the tract of country from the ordinary regulations, enforcing the residence of British officers there, and employing the Santal headmen in a local police, he ensured a system of administration which afterwards proved eminently successful.