The Australia international was released by the Baggies after just one season.
The 23-year-old joined the Baggies from Eredivisie club Heracles only last summer after impressing for Australia, but he failed to much of a chance to impress at the Hawthorns, making just five appearances for the first team.
The arrival of Tony Pulis in place of Alan Irvine was bad news for the left back, as he failed to feature under the Welshman.
He will now be heading to the John Smith's Stadium where he will work under former England fullback Chris Powell, with there being little competition in that position currently at the club.
Considering the impression Davidson made in Brazil last summer, and the high hopes that the Baggies had for the Melbourne native when he joined, it is an excellent deal as the Terriers seek to push on from their 16th place position.
Davidson is quoted by the Examiner as being appreciative of West Brom for allowing him to move on after failing to establish himself under Pulis.
“Sometimes coaches love you and sometimes you don’t fit their style," he said at the time.
“You have to respect that and we mutually agreed to move on. I think West Brom respected me as a person and as a player and allowed me the opportunity to see where I go next."