Paterson was born in Dundee, Scotland and attended the Royal Scottish Academy and exhibited his work while still a teenager. He spent three years in Melbourne, Australia, from 1872 and then returned to Scotland. From 1884, he was again in Melbourne, and gained a reputation as a landscape painter. Paterson renewed his friendship with the Swiss-born landscape painter Louis Buvelot whose en plein air methods suited Paterson. In 1902 Paterson was elected president of the Victorian Artists Society, also in the same year he was appointed a trustee of the public library, museums and National Gallery of Victoria.
At the Victorian Artists Society winter exhibition of 1896, Paterson's 'Evening in the Bush' received excellent notices.