[Andrew]

Yes, you can use WebDAV for backup via the sync feature. No, you don't need to seed the sync location in any way (other than making sure that the folder you pointed OmniFocus at actually exists and you have appropriate permissions to read from and write to it).

However, not all WebDAV servers actually implement the WebDAV spec perfectly, as we discovered, so it's possible that we won't work with OnlineFileFolder (the service I see that you are using). I don't recall anyone else posting about that service (I may have overlooked it), so I don't know that it's been tested by anyone with OmniFocus before. (It's also possible that we have WebDAV bugs in OmniFocus, of course, but to the best of my knowledge all of the problems we have hit so far have been due to server issues like not correctly handling move commands or not allowing certain filename characters that we rely on.)

The message shown in that first alert panel implies that the server copy somehow got corrupted. Hard to know if this is due to a WebDAV incompatibility or some other oddity. I'd suggest manually removing the server copy and syncing up from the iPhone again; if subsequent syncs show the same error, then it's probably a WebDAV incompatibility.