Perhaps the project isn't compatible with Grails 1.3.7. You could try downloading an older version of Grails and configure that in your workspace instead.
When it asks you to upgrade to Grails 1.3.7.. you can say no and another dialog should prompt you if you want to configure the version of Grails that
project declares it was originally using. Unless this is a really old version of Grails (pre 1.2) it should work fine in STS using an older version of Grails.
The "upgrade" runs the Grails upgrade command, but it really isn't a 100% guarantee that the code of your project will work in the new version of Grails.
Kris De Volder -- SpringSource