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This thread is resolved. Here is a description of the problem and solution.
Problem: 2.7 to 4.0 WordPress: Destination folder already exists
Solution:to do this with your plugin activated you would need to have WPML activated and then go to Plugins ->Add new-> Commercial tab and upgrade from within there BUT it is highly likely that this will fail as you are updating from an older version.
for this reason we recommend doing this manually
to do a manual update please follow these steps:
1. Backup your database – see for example: http://wordpress.org/extend/plugins/wp-db-backup/
2. Deactivate the existing WPML plugin and add-ons.
3. Delete the plugin files – this does not delete your translations. You will simply delete the plugin files from you "wp-content/plugins" folder NOT the database records.
4. Download the updated plugins from our servers and upload them to the plugin directory.
5. Activate the WPML plugin and add-ons.
Now , if you delete the plugin the translations and your settings will not be lost as they are saved in the Database , but if you want you can always go within your FTP and rename the old WPML folder by adding " .oldversion " at the end of the name.