Dispersion of droplets in an emulsion is commonly seen in several chemical, pharmaceutical and petroleum industries. Electric field has been shown to affect the stability of these dispersions. We study the dynamics of a pair of leaky dielectric droplets in a leaky dielectric liquid in the presence of an externally applied electric field. A pair of droplets may coalesce or repel each other in the presence of an electric field. Interactions between a pair of drops have been shown to be governed by the ratio $\varepsilon _r/\sigma _r$, where $\varepsilon _r$ and $\sigma _r$ are the ratios of drop to ambient fluid electric permittivities and conductivities, respectively. When inertia is neglected, the droplets approach each other if $\varepsilon _r/\sigma _r > 1$, whereas droplets repel when $\varepsilon _r/\sigma _r < 1$. However, inclusion of inertia permits interesting transient behaviour, where the droplets may attract due to the electrostatic dipole–dipole attraction even for $\varepsilon _r/\sigma _r < 1$. The approach velocity then is governed by the electrostatic forces and varies as $1/h^4$, where $h$ is the separation distance between the droplets, in contrast to being hydrodynamically driven as predicted in the Stokes flow limit by Baygents et al. (J. Fluid Mech., vol. 368, 1998, pp. 359–375). For compound droplets, interactions between droplets are essentially governed by the electrical properties of the outer droplet and the ambient fluid. However, transient dynamics may also result in the breakup of a compound droplet and lead to formation of single droplets.