Thanks, I've tried this. My amended configuration is below. However, I'm still getting the same error when the upstream goes away. The cache directory is now being populated correctly however. Any ideas?

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user www-data;
worker_processes 4;
pid /run/nginx.pid;

events {
worker_connections 768;
# multi_accept on;
}

http {
upstream localsvr {
server localhost:8080;
}

proxy_cache_path /data/nginx/cache levels=1:2 keys_zone=one:8m max_size=5000m inactive=300m;
access_log /var/log/nginx/access.log;
error_log /var/log/nginx/error.log;
server {
keepalive_timeout 65;
types_hash_max_size 2048;
proxy_buffering on;

default_type application/octet-stream;

gzip on;
gzip_disable "msie6";
listen 80;
proxy_cache one;
proxy_cache_min_uses 1;
proxy_cache_valid 200 302 10m;
proxy_cache_valid any 10m;
proxy_set_header Host $host;
location / {
proxy_pass http://localsvr;
proxy_cache_use_stale error;
proxy_next_upstream error;
proxy_redirect off;
}
}
}