I can see him refusing if Peyton is viable to play. That said, The colts are in a huge mess of what they are gonna do, because if they get Luck and they decide to keep him, unloading Manning and getting something of value in return will be an issue because they will end up eating money either way.
I don't think they're going to trade Manning. His contract is gigantic, on the order of almost 30M so Peyton essentially has a no-trade clause in his contract. They can still outright cut him but that seems like a bad PR move in Indy. There are very few teams in the league that want that type of cap hit. Palmer was a good trade for the Bengals but his cap hit is only 5M for the Raiders.
IIRC, the couple teams that might be interested in Manning are maybe the Jets, who are at the cap with dumb contracts like Sanchez for 14M+ and Holmes for 8-12M and maybe the 49ers but I don't think they have the guts to dump Smith and disturb team chemistry since he's doing "okay" right now.
Based on the public comments, I think they'll keep Manning if he's healthy and just ride him for 3-4 years until he retires. If Luck holds out like Elway/Eli, they can still trade him for like four or five #1 picks or something ridiculous since everyone is so high on Luck. I think it's a real possibility since Elway was a Stanford guy too, Oliver is smart, and Andrew seemed pissed yesterday when asked about sitting on the bench for 3 years. Short term, Luck would take a minor PR hit. Long term, no one really remembers the Chargers and Eli or the Colts and Elway.